Since our last commentary in March, most major markets have continued to climb through geopolitical tension, war, massive overvaluation in the US, and the biggest oil shock ever recorded.
In this commentary we look at where some of these gains have come from, why we have taken profits in areas that have moved sharply, and how we are thinking about the balance between Attack and Defence in an obviously extreme market environment.
We also turn to the UK, where poor politics continues to sit awkwardly alongside an attractive stock market, before ending with two wider risks investors cannot ignore. A record-breaking IPO, and the 5 phases building up to oil Armageddon.
For nearly all of you, this matters directly as your money is managed through our Discretionary Fund Management service (DFM).
You will have noticed that the last year has been a good one for your DFM portfolio, despite chaos in the wider world. From that positive perspective it is a good time to confirm what we have been doing, and then look at some of the broader issues.
For 9 years out of 10 (figuratively not literally) our approach from year to year is to think in terms of Attack and Defence. The attack is how we allocate across different assets and select funds. The defence is how we protect the portfolio from the risk of unacceptable losses e.g. stop-losses. A clear structure.
On the spread of the portfolios, the asset allocation, the bulk of each portfolio is spread across sectors where we see outstanding value and long term opportunity.
Then we select funds within these sectors based on “momentum” – at its simplest that means those funds which are outperforming their peers over certain periods. A clear process.
That’s the typical years, 9 years out of 10, with portfolios fed by a clear structure and a clear process.
In the 10th year it gets more challenging. Stock market valuations are extreme, debt is mountainous, internal politics is strained, global politics are fraught. Climate, health, and demographic risks are icing on the wobbly cake.
It becomes necessary to adapt.
You might have spotted the huge gains in the Korean stock market, around 90% just in 2026. Some of you might also have been pleasantly surprised by how this has spiked growth in your Asian funds. All very exciting. We have certainly enjoyed these gains in the Dennehy Wealth discretionary portfolios.
Perhaps Korea sounds fringe. It isn’t. Their stock market is now bigger than those of the UK and India. The size of their economy per head of population is slightly less than the UK and Germany, five times bigger than India, and more than twice that of China. This is a very mainstream country.
But gains of 90% in 6 months are not what we would expect from such a mainstream investment destination. What is going on?
It has been driven by just two stocks linked to the panic into AI-related stocks, which is like a table with only two legs – with a tendency to wobble! It gets worse. The behaviour of Korean investors is ticking every single box for a historic mania.
Investment fever has spread across South Korea. Retail investors talk of nothing else – over breakfast, lunch, and dinner – on tea breaks, public transport, and shopping outings. Not very well-healed pensioners are selling life policies to fund stock purchases – young people are less enamoured of studying and working hard, and more attracted to getting rich quickly in the stock market. FOMO abounds (fear of missing out).
It will end in tears for many. But nobody knows when – Korea could double or halve from the current level. What’s to be done if you are sitting on handsome gains, as we were?
Here’s an example, not too far removed from recent events:
If a fund goes up 40% in a couple of months, your gain is roughly 4 times the average long term returns from US/UK stock markets over 12 months. If this was a commodity fund, say gold miners, such a big move would not be that unusual, and you might be tempted to sit tight and enjoy the party – perhaps eyeing a gain of 80% within 6-12 months.
In contrast, if you are investing into mainstream economies (such as Korea) a stock market gain of 40% in two months is certainly an outlier, almost free money. That is when you consider locking in your gains – sell the lot, sit on the sidelines and give yourself the luxury of thinking time while sitting on some cash.
It is clear that the recent Korean gain is an outlier. This is also “the 10th year”. Risks are self-evidently extreme – stock market, bond market, politics, geopolitics. Big profits can disappear overnight. Adapting becomes important, something you might not have had to do for many years, which is why it is not an easy adjustment.
There is no perfect solution. But it is important to know when you have to adapt. When you must tighten the Defence, and adjust the Attack. When you must take substantial profits dropped in your lap from unexpected sources – this is free money.
Now to the UK, where a culture of political incompetence has been entrenched for too many years, across the political spectrum, yet where the UK stock market continues to hold huge potential if whoever camps out in Downing Street gets a grip on reality.
Firstly it must be clearly understood that if, as a government, you spend more than you take in taxes, you are in hock to the bond markets because they lend you the money to fund your extravagance. If you don’t want to be in hock to the bond markets, cut spending. And if the government wants a bigger tax take, find ways to grow the economy. That’s it.
The next obvious question is what drives the economy? What is the motor? Because if you can get more out of the motor, you will naturally generate higher taxes, and then you can fund your political agenda.
Small and medium sized businesses (SMEs) employ 60% of all those working in the private sector. This is the spine of the economy, which stretches down every High Street and through every town and village and farm in the UK. If the government didn’t get distracted by personal advancement, migration, who uses what toilets, and VAT cuts for theme parks, it would free up considerable time to think about how to turbo-charge this motor of the UK economy.
Tax incentives to re-invest into your own business; reforms to encourage investors and banks to support SMEs; tax breaks to bring young people into roles to learn new skills. You will all have your own ideas. The key is that these are presented as a coherent and plausible package, not piecemeal.
Investors are mostly giving the UK the benefit of the doubt, acknowledging the attractive valuations, and midst a drip-drip by global institutions away from the deadly embrace of the historic bubble-cum-mania in the US. The FTSE 100 is up 4.5% in the year to date, slightly above the long-term average over this length of time. Of the major indices, and aside from Korea, only Japan and the tech-driven US are ahead, and substantially so. Germany and France are barely moved, and India is having a bad time, down 15%.
In the short term, we hope that Summer shenanigans in the Labour party don’t frighten off investors, as their patience is understandably wearing thin.
The big investment news in the last couple of weeks is the pending IPO (share offering) of Elon Musk’s SpaceX at an extraordinary valuation. Views are extremely polarised, as you might expect. For now I share with you some of the funniest bits in the IPO filing document:
- The stated mission is “to extend the light of consciousness to the stars”
- SpaceX uses the phrase “rapid unscheduled disassembly” to describe what happened when Flights 7, 8, and 9 of Starship all exploded in early 2025. This is the corporate equivalent of writing “the car experienced an unplanned stationary moment” when it crashed.
- “We are becoming a civilization with the ability to reach beyond Earth’s cradle”
- “The light of consciousness will not be tied to a single planet subject to the inevitable hazards of a harsh and vast universe”
- “Our goal is to understand and explain what the universe appears to be doing”
- “We are preventing the extinction of consciousness.”
Hmmm.
Last but not least, back on planet earth it is the outlook for a fossil fuel which is the wild card, oil.
There are 5 stages before we hit oil Armageddon. The UK is currently at stage 2, and we are told “There Is No Shortage”. Fuel is still broadly available, but the system is under strain. This is the stage where complacency can be dangerous. The phrase “no shortage” is not proof of safety. It is a sign that the issue has become sensitive enough to require reassurance.
If we move to stage 3 the politicians will demand “Please Behave Responsibly”. The government moves from reassurance to demand management. The language will change to: “avoid unnecessary journeys,” “buy only what you need,” “work from home where possible,” etc. Broader stock markets will begin to react more sharply.
You don’t want to know what stages 4 and 5 look like, not unless and until it becomes relevant.
Trump desperately needs to resolve the problems he has created in the Near East. But so does the rest of the world… because stages 4 and 5 are ugly for everyone.
We are prepared for all eventualities.
