Stress Testing Your Portfolio: Will we add Gold, Treasuries or Nasdaq?

The Art of Investing

The hosts conduct a comprehensive end-of-quarter portfolio review amid rising bond yields, oil price volatility from Middle East tensions, and strong AI-driven corporate

Key takeaways

Micron reported an 87% gross margin and is sold out for the next two years, underscoring sustained AI chip demand.
OpenAI delayed its IPO into next year while planning to raise $30 billion in funding amid high borrowing costs.

Main topics

End-of-quarter portfolio review
Bond yields & recession risks

Notable quotes

The only all-time high I can report on was NASDAQ overnight.

Conclusion

The episode delivers actionable portfolio adjustments based on diverge

Transcript preview

Speaker 3 (0:00) In today's episode of The Art of Investing, it is the end of quarter portfolio review. So big questions asked around our allocations. My equity expert wants to buy the Nasdaq at new highs. My bond guru, we ask, is it time yet? CJ puts three scenarios to us for the future of the economy in the rest of the year. So find out, is it Goldilocks and the two bears? Or is it Goldilocks and the big grizzly? Speaker 3 (0:36) It's that time of week again. Welcome to The Art of Investing, brought to you by IG, the global investment platform, your favorite UK finance podcast. Now, with me, my expertise expert, Mark Spiceholden. Hi, Rich. And somebody who's given us homework to do this week. It's Chris CJ Fellingham. Hello, Speaker 2 (0:55) Richard. What is coming up on today's show? It's the end of the quarter, so we need to do a comprehensive portfolio review. But I think we need to give also... a bit of time to review what our themes are for the next three months. Have we changed what we are thinking is going to happen? So I'm going to spell out three scenarios a bit later on in the podcast. And then I'm going to ask you guys to tell me what you think is going to happen in each of them and the probability of them happening. So when we get to what should we do with our portfolio? As people will remember, this is one of the unique points about this podcast is that we run our own portfolio online. When we get to the bit where we think about what we're going to do in our portfolio, we actually have got something backing it rather than Spice just telling us he's bullish. Speaker 3 (1:39) And I'm assuming these three scenarios, they're different economic conditions. Speaker 2 (1:44) Yes, they will be different economic conditions, but they're what we think the market will... will start to think about as the dominant themes for the next three months. It's not any longer than that because we can write many different themes for that. They're my ideas of what those three themes could be. You guys are doing all the work once again. So that's what we're going to be doing, Rich. Back to you. Well, just one request before we move on. We've been nominated for the Finfluencer Awards. And Speaker 3 (2:12) we could really do with your help once again. Apologies for asking, but if you could just take a couple of minutes to go online, you'll find the link below in the notes. If you can click on that, we have been nominated in the Best Economist Influencer category. Whoa. Speaker 2 (2:28) Yeah, that's an interesting category. Not sure you get a lot of economics. It must be because Stewie Thompson comes on here. Thanks, Speaker 1 (2:36) Stewie. Speaker 2 (2:36) So Speaker 3 (2:37) if you could vote in that for us, that would be fantastic. Sorry, if you could vote for whoever you think is the right winner of the category. Yeah, yeah, weak, weak. The more votes, the better. And then I think, Spice, you've got something for us as well. Speaker 1 (2:51) Yeah, just a little bit of admin. Obviously... On Tuesday, the 13th of October, we have our live podcast event at Lourdes. You will shortly be receiving an email if you've already applied by email. We'd ask you just to send us a confirm back because we're very, very oversubscribed, I'm pleased to say. So the more the merrier, but please just let us know you're definitely coming and that will make our lives a lot easier to judge. Food and drink, more importantly. That's it. Speaker 3 (3:19) Yeah, send us a conform so we know how many to cater for. Now, after all that admin, you'll be very happy to hear we're going into the Spice Market Review. Speaker 1 (3:28) Thanks, Rich. Well, as CJ alluded to earlier on, it's the end of the third quarter of the year. Can't believe how time has flown. And we're into, what, seventh or eighth month of the Gulf War. Oil remains extremely volatile, particularly in the last week or so. It's been very... intraday volatile. Even today, overnight, we've seen a near 4 % to 5 % move from a low point when the oil price was down about $2 to up to $3. So, a big move, 4 % to 5 % today. We've had some very mixed economic data today. Just coming up to throw in for good measure, we've got the French budget next week and the UK budget coming up shortly. So lots to talk about. But let's get into the sort of detail. The major asset moves, like I say, oil has been the big sort of driver. And every time the oil price has gone up, markets have typically gone down. So there's a very big, close link at that at the moment. And that's despite the fact that supposedly the US and Iran are in talks. about solutions. JP Morgan and Goldman's are now saying that their oil flows through the Middle East and through the Straits of Hormuz are back to pre-war levels. Wow. And yet the oil price is still fairly heavily elevated. Interestingly... How Speaker 2 (4:40) can that be the case, Price? Do you believe that, that they are back to those levels? Because it doesn't really strike... truth with the way the oil price is performing. Come on, you are the expert. Tell us how you square that circle. Speaker 1 (4:54) Well, I think there's been a big drawdown of reserves by the big countries, particularly in China and the US. And China, having said, we'll just use our reserves at the beginning of the crisis, are now starting to rebuild not just what they want for their economy, but also to put some back into their strategic reserves. And this week, actually, to try and take some pressure off, the US released another 40 million barrels of oil. into the system. That is to help the refiners. You remember the diesel price in America has hit an all-time high, despite the oil price being some way off the all-time high. That's because the refiners haven't got the product, the raw oil, to refine into diesel and unleaded petrol and airline fuels and so on, etc. So they've done that. And it's put a cap so far on the diesel price. It hasn't gone any higher, but it's still very high. I think more interestingly, the Iranian situation... still bubble was away in investors' minds. And there are a lot of people still speculating on that oil price. So there's a lot of speculation in that price rather than pure fundamentals of supply and demand. Speaker 3 (5:53) And the US strategic reserve has come down from a billion barrels down to near 200 million. Speaker 1 (5:59) Exactly. Wow, that's huge. It is huge. I mean, you know, even when flows are back fully, as if they are now, they're going to have to start building those up. And that will take, you know, as I say, that will skew. more positively for the demand side rather than the supply side. Speaker 3 (6:12) Not forgetting all that money has been going into the budget deficit, remember? Yeah. So it's kind of helped at the same time. Speaker 1 (6:19) Well, and midterms are coming up, so things have got to happen pretty quickly to get those diesel prices down. And interestingly, Iran, one of the Iranian officials sort of quietly said yesterday, we're not going to do a deal until after the midterms. I think they basically want to knife Voldemort ahead of those midterms at the beginning of November. We'll see. The only all-time high I can report on was NASDAQ overnight. NASDAQ futures is at an all-time high after some very strong results from Micron, which I'll talk about in a bit. Yeah, that's the only real all-time high in sort of equity markets this week. Across the board, the chip sector has been pretty flat. Magnificent 7, pretty flat. And even Bitcoin, pretty flat. So it's been a pretty dull week behind that oil price where there's been a lot of sort of volatility. In commodities, again, it's been pretty stable. It hurt a little bit by the dollar being strong. Now, for the last three weeks, I've had to report the dollar has been very strong. And again, this week, it's up nearly 1%. And that has weighed on gold and silver and copper, as you'll see when we come to talk about the portfolio. And it's also, again, in my opinion, and we'll have a debate about this later, also weighing perhaps on bond yields. That is the oil price there. Speaker 2 (7:27) It's a real debate going on. whether the risk markets can resist the way the bond markets are moving. And the bond markets are just moving higher in yield almost every day. And people are looking over at the equity market and saying, you know, is it holding today? And it is holding. And so they move a bit higher. And it's a real issue here, the way these bonds are moving. But as we've talked about on many, many different occasions, it's when the bonds get to a certain level, that level is uncertain. that it will have a really big effect. And at the moment, it's stopping equities. It's not actually bringing them down until today, when, as you say, there's been a lot of volatility in the oil price. Here we are talking on Thursday. We've seen some dramatic falls in European equity markets at the start, as their bonds have broken through key levels. And today, we've got the 30-year UK Treasury gone through 6%. Crypto. Just very briefly, we've been bullish on crypto for some time. We thought that the market is stabilized. It continues to do very well. And I think that will continue. Speaker 3 (8:37) Yeah. Yeah, it's really, really interesting to watch the relationship between gold and crypto moves because cryptos are moving with growth and gold's moving with real yields. And the disparity between the two is incredible. Anyway, Micron results. Yeah, exactly. Micron results. Speaker 1 (8:55) Back to the AI theme, which we can't get far away. Very good results from Micron. Obviously, they're one of the biggest makers of memory chip. They had a fantastic gross margin. So that's the sort of profit before they start taking things like tax and interest off. And that was 87%, expected to be 85%. But they warned that it might be a bit lower next year. And that's because, guess what? They're going to pay their staff more, which is quite interesting and laudable, I suppose. So they've just warned that slightly higher wage costs are going to mean that that margin doesn't keep pushing up. Speaker 3 (9:24) But it's still 86%. Oh, Speaker 1 (9:26) it's amazing. It's an amazing gross margin. And they basically said they're sold out for the next two years, as far as they can see. So that's very powerful. Also, this week, we've seen OpenAI, who have delayed their IPO or their time to come to the market into next year. So they say in the background, they're going to raise another $30 billion as you do. What's $30 billion? Between mates. Speaker 3 (9:47) Watch those bond yields go up a little Speaker 1 (9:49) bit more. Speaker 3 (9:50) How much is it going to cost? That's the interesting thing. Speaker 1 (9:52) Exactly. It's not just AI companies out there raising lots of money. Paramount Skydance, who are taking over, you remember Warner Discovery, are raising $52 billion worth of credit and loans in the next week or so. And they're basically raising $30 billion in investment grade. Those are the highest quality. corporate bonds and they're raising 30 billion and they're paying or offering interest that's 300 basis points or 3 % above the treasury yields for the equivalent period. So if the 10-year yield is 5%, they're offering loans at 8%. What if it's 5.5 %? Well, that'll be 8 Speaker 2 (10:34) .5%. Speaker 1 (10:35) And they're also issuing a load of high yield or junk. Speaker 2 (10:39) So let's just say what you said there, 300 over. So today, the 30-year yield in the US is 564. So they're borrowing at 8.64 % for 30 years, if they were borrowing 30 years. 8.64%. Wow. To buy a Speaker 3 (10:55) communications and media company. Speaker 1 (10:57) But it's all about the streaming, isn't it? And I think that's, you know, that's the way it is. I mean, who watches real-time television anymore? It's pretty rare, unless you're watching sporting events. And with that, that's the end of the Spice Market Review. Speaker 3 (11:09) Your capital is at risk. The value of your shares, ETFs Speaker 1 (11:12) and Speaker 3 (11:12) ETCs can fall as well as rise, which could mean getting back less than you originally put in. This content is for information purposes only and is not investment advice. Past performance is not an indication of future results. Takes us perfectly on to the portfolio review. So let's look at the overall performance. It is down negative 0.5 % week on week. That leaves us up 12.5 % year to date. Now, what has happened in the last week then? Well, the Nikkei has been our best performer, up 3 % on the week. FTSE 250 up 0.6 % and the NASDAQ 100 up 0.3%. Nikkei really stands out there, doesn't it, Spice? What's going on in Japan? Speaker 1 (11:50) Yeah, it does, Rich. There's a survey that companies do called the Tancan survey, and that's come out in the last 48 hours. And it actually showed that companies are much more positive about the growth outlook in Japan than they have been for some time. At the same time, interestingly, they're also more dovish, or in other words, they're not worried about the inflation outlook. And that's really interesting because the oil price, as we talked about earlier on in the market review, has remained very high. A combination of lower inflation expectations, higher growth expectations, has meant that actually the odds on another interest rate rise from the Bank of Japan in the next month or two has fallen quite dramatically. And that's helped the equity markets. Not at all-time highs. But they have made some very good ground in the last few weeks. Speaker 2 (12:31) That's going to cause a problem, isn't it? In the end. I love equity, people. They can always find something to be bullish about, right? But now we've got the yen now pushing much weaker again. And we had Scott, the house person, I keep going until people are really sick of that. You know, he said, well, I turn this thing because I know what's going to happen. I know what's going to happen and you shouldn't bet against it. The Ministry of Finance said the same thing today in Japan, said, you know, we're warning about the yen being too weak. So I think the market's completely wrong. I think they will tighten more aggressively. But in the short term, they took so less from that figure. I think bigger macro picture is not looking great. I would say that because I sold 2.5 % last week. So I have to say that. I mean, not to book in any way, shape or form because I've never been accused of that. Speaker 3 (13:20) Well, what do we wish we had sold 2.5 % of? That is India because the performance this week, dreadful, down 3.8 % on the MSCI India. We got BlackRock World mining down 3.1%, also poor performance. And that comes partly from copper down 2.3%. Also gold, which we don't have in the portfolio. was down 3 Speaker 1 (13:41) -4 % Speaker 3 (13:42) just on Monday alone, as those real yields march ever higher. And then worth noting emerging markets also down 1.7%. So you can see that gave us a week-on-week total of negative 0.5%, with year-to-date up 12.5%. And since inception, up 25%, but we're also starting to measure our second year. So the first 12 months, we were up 26%. But going into that second year now, we are down 1 % since that anniversary. Speaker 2 (14:18) And that Speaker 1 (14:19) is why Speaker 3 (14:19) today's portfolio review is going to be comprehensive, Mr. Sherman, isn't it? Speaker 2 (14:24) Well, it's always comprehensive, Rich. But it depends how many hours people have got to listen. Let's start just very quickly on the third quarter to give an idea of the variety of returns.