The Notebook: Investing in what you know has lost its relevance in 2024

Where the City’s movers and shakers have their say. Today, Interactive Investor’s Richard Hunter takes the pen, with the latest insight in all things investment

Investing in a globalised world

It is fair to say that investing internationally is a requirement in the modern age, despite the lingering temptation for UK investors of home bias.

The previous prevalence of home bias arose from the old market adage of “investing in what you know”. 

However, this has less relevance now given the preponderance of, for example, household US names which are now familiar in the UK, ranging from Apple to Microsoft, and from McDonald’s to Starbucks. 

Indeed, it is estimated that the US markets now account for almost 70 per cent of global market capitalisation in the form of the MSCI index and, as such, this market cannot be overlooked. 

There have been many developments over recent times for this to be less of a daunting prospect than was perhaps previously the case. 

Dealing fees for direct US equity investing have fallen dramatically and are now often much in line for those applying to UK stocks. 

There is also a significantly wider choice available for any number of international investment opportunities via the likes of Exchange Traded Funds, let alone the possibility of indirect exposure through investment trusts or funds. Even the FTSE 100 provides some indirect overseas exposure, given that some 70 per cent of company earnings are based overseas.

This is a major factor in explaining the slightly counterintuitive fact that if sterling strengthens against the dollar, this has a downward impact on the FTSE 100, all things being equal.

In a global investment landscape, currency exposure is almost unavoidable, be that directly or indirectly and investors should factor this into their decision-making process when considering buying shares.

Underpinning such a decision, whatever the country or currency, the investor will still be largely driven by the more fundamental aspects of the individual share, which will include the likes of its economic moat, growing and sustainable profits, a strong dividend record and its commercial advantages over other companies in its sector.

In any event, there is now the opportunity as well as the need for investors to look further afield to reflect the changing economic landscape and increasingly integrated nature of global business.

Water sector woes

The woes of the water sector continue.

Amid increasing scrutiny of sewage spills, water pollution and leaks which have led to various fines, Thames Water has now said that bills will need to rise by almost 60 per cent between 2025 and 2030.

The company has an estimated debt pile of some £15bn and claims that it only has funds to continue trading until May next year.

In the meantime, it is believed that the company’s highly indebted status has led to interest payments of £200m over the last five years to its creditors.

The latest on Nvidia

Despite an update from AI market darling and semiconductor maker Nvidia, which forecast third-quarter revenues of $32.5bn, which exceeded estimates, the shares fell by two per cent on the day and by six per cent the following day. The company is facing increasingly higher hurdles to please investors, following a stellar share price rise which includes a hike of more than 140 per cent this year alone. Caution ahead of the group’s numbers inevitably washed through to the more tech-exposed S&P500 and Nasdaq indices, given Nvidia’s disproportionate weighting on both.

Burberry checks out

Barring a last-minute miracle, Burberry will lose its place in the FTSE 100 after a tortuous year. A slowdown in demand for luxury goods has weighed on the sector, especially from Chinese consumers. Burberry grabbed the headlines in July for the wrong reasons, announcing an immediate change of the Chief Executive, accompanied by a suspension of the dividend after what the company described as a disappointing start to the year. The shares have declined by 68 per cent over the last year and its demise will see Burberry lose its FTSE 100 status after a run which stretches back to 2009.

Quote of the week

“There is a budget coming in October and it’s going to be painful.”

Ominous words from the new Prime Minister Keir Starmer.

A recommendation

For the past 18 months or so, investment trust fans have been spoilt for choice in terms of potential bargains. These occur when an investment trust’s share price is trading below that of the underlying investments (known as the net asset value, or NAV). 

However, there’s always the danger of catching the proverbial falling knife as investment trust discounts can widen further. It was therefore interesting to hear the views of experienced investment trust buyer Peter Hewitt on where he’s finding value opportunities right now. Hewitt was speaking on a recent episode of Interactive Investor’s On The Money podcast, hosted by my colleague Kyle Caldwell. The weekly podcast, which comes out every Thursday, is available on all major podcast apps, including Spotify, Apple Podcasts and Amazon.