Over the past few months, we have seen a steady rise in global market valuations which has predominantly been from the US, with the technology sector leading the charge in prices. This has given concern in terms of another “dot com bubble” as seen in the 90s. There are some key differences. With regards to valuations, Nvidia (the super chip producer) is trading at 29 times its price to earnings. This is well below the trading values of Nortel Networks and Yahoo Inc, which were both well above 100 times earnings in the 1990s. Spending on AI is from operating cash flows which support AI expenditure, whereas in the dot-com era spending was dependent on debt financing. Whilst we remain vigilant of the potential fall out of valuations of AI companies, there remains sufficient optimism in its future and how it will change the way companies operate in the future and the potential to increase productivity of nations.
Turning to Inflation, it remains at elevated levels with the UK the highest of the G7 nations at 3.8% (nearly twice the target rate set by the Bank of England). The US inflation rate has been surprisingly low at 2.9% given the tariff effect on imported goods. However, this could well rise in the coming months as the price rises passed on by manufacturers filter through. The Eurozone has remained relatively stable and just above target at 2.2%.
Given that the UK continues to have an elevated inflation rate, it remains uncertain when the next interest rate drop will occur, much depends on how the economy performs. So far GDP has been sluggish to say the least, with it growing by just 0.2% in the three months to July 2025. If the economy weakens more than expected, then this will put pressure on the Bank of England to reduce rates even with well above inflation figures.
There is much speculation with regards to the looming budget on where and what taxes will need to be increased in order to plug the black hole in the public finances. It is no secret that the UK is not alone in having a significant and rising public debt burden. Japan, Greece, Italy, the US and France are all well ahead of the UK in terms of debt to GDP ratio. Most Governments have seen the cost of borrowing increase over the past year as bond markets become uneasy with the rising debt of nations. This is the reason why the Chancellor has to make sizable tax hikes in order to provide confidence to the markets and bring down the cost of borrowing, whilst giving her a decent amount of fiscal headroom should there be an economic downturn.
As the weak economic data coming through the oil price has continued on a downward path and is currently trading below $60 a barrel, which is roughly 20% down from last year…good for inflation but shows the oil markets view on global economic activity and demand for oil.
Taking all of the above into consideration, it remains very pertinent to maintain our well diversified portfolios and to make changes as and when necessary to ensure they perform in line with expectations.