Hamish McRae: Bold Investors Have Proved the Market Pessimists Wrong This Year

At the halfway point of the year, investors could be forgiven for feeling as though they have already endured a full 12 months of market drama.

Imagine being told on January 1 that conflict in the Middle East would escalate, the Strait of Hormuz would be closed and oil would surge beyond $100 a barrel. Most people would have braced for a sharp fall in US stocks.

Likewise, if you had been warned that Keir Starmer and Rachel Reeves would be on the way out, you might well have expected British markets to wobble badly.

The natural reaction would have been to assume conditions were turning dangerous and to cut risk. That might have meant selling shares and moving money into cash, or into assets traditionally seen as safer, such as government bonds. Yet that instinct would have led you in exactly the wrong direction.

So far this year, the S&P 500, widely regarded as the clearest gauge of US equities, has climbed 9 per cent. In the UK, the FTSE 100 is up 7 per cent, and once dividends are included, the return would be above 8 per cent.

Government bonds, meanwhile, have offered far less comfort. The yield on US ten-year Treasury notes stood at 4.2 per cent in January and has since risen to 4.5 per cent. Ten-year gilts, the UK Government bond benchmark, have moved from 4.5 per cent to 4.8 per cent.

Because bond prices fall when yields rise, the overall picture is disappointing. On a rough calculation, even after allowing for the interest received, investors would be sitting on a loss of around 1 to 2 per cent.

What’s the explanation? What’s the message for the second half of the year, and what does this say about investing more generally?

The simple explanation of what has happened to bond prices is to note that wars cost money in all sorts of ways and push up inflation, so investors want a bigger premium to lend to governments.

For equities it is more complicated, as the UK and US are very different. American shares offer both the hope of technology-driven growth and solid profits for established corporations.

British-quoted companies also offer profit growth, but the key feature is that our market, by contrast, is a bargain basement.

The message for the second half is generally positive. The professionals in New York are bullish, with Morgan Stanley and Goldman Sachs both looking for the S&P500 to rise from 7,500 at present to 8,000 by year-end.

In London there is more caution, for example with UBS suggesting that the FTSE 100 could go to 11,000 this year, up from today’s 10,679, but not far above the peak in February just before the Middle East war of 10,935.

Insofar as it is sensible to generalise, the big fund managers and investment advisers do not seem to rate the possibility of a share crash this year as very high. The overall view is that we are in a mature bull market for equities, but the forces that will cause it to end are not yet in place.

And investment more generally? Last week we had the latest annual Global Wealth Report from UBS, which assessed how global wealth had grown in 2025. 

Among the headlines were that stock market gains last year created nearly a million more dollar millionaires. Also that global personal wealth rose nearly 11 per cent. And that Australia now ranks third-highest for median wealth. 

As well as, more dismally, that allowing for inflation Britain had the sharpest fall in wealth of any country in the survey. 

That’s because for most of us our homes are our biggest investment and since 2020 house prices have failed to keep pace with inflation.

Unpicking all this, the message I take away is that the enemy of people who want to try to build wealth, or even become comfortable enough not to have to worry about money, is indeed inflation.

It is not crashes in share prices, though they will inevitably come, for eventually global equities will produce positive real returns.

As long as people start saving as early as they can, keep adding to their pot and keep reinvesting the proceeds, compound interest will enable them to build real wealth – not to become billionaires but to be ‘the millionaire next door’.

But there’s another enemy. Governments not only permit inflation, they tax away paper gains even though these are only compensating for inflation and not real gains at all. 

That’s a fight for fairness and we need to arm ourselves for it.