Sam Dickie: Fisher Funds expert on the impact of UK long-term borrowing rates

We have talked a few times about the mountain of US government debt and soaring government borrowing rates, but this is actually a wider global problem. UK long-term borrowing rates are hitting fresh 30-year highs, and it is quietly splitting the share market in two. Sam Dickie from Fisher Funds is with us on this. Hey, Sam. Hey

there.

Where are we on this now?

Yes, well, the $40 trillion of US government debt is, just to recap, is costing them a fortune just to pay the annual interest on it. And when you and I spoke just a few short weeks ago, those long-term interest rates were about 5.3%. They hit 5.7% a couple of days ago. And as you said, it's not just the US, the UK, 3%. 30-year borrowing rates are really long-term rates. The government's borrowing had hit 30-year highs. And France is another one to keep an eye on. This sort of is a hark back to the European financial crisis. The extra interest investors demand from France as a spread over Germany, Germany being the sort of stable one in the region, is back to where it was in the 2012 euro crisis.

What is driving it?

Yeah, it's the same stuff. So its deficits keep growing and no politician wants to fix it. And inflation is sticky with oil still elevated. And we got a rude reminder of that overnight with US inflation data coming in slightly hotter than expected. And then there's this other crowding out effect that you and I have spoken about. So AI is issuing so much debt now, or AI companies, that they're competing with governments for money. And when AI companies and the government compete, are climbing over each other to borrow, it sort of drives up the price of money. And the final thing, of course, is some of this is very healthy. We can't lose sight of that. Global economic growth is solid and stronger than expected. And when an economy is robust, you should expect money to cost a little bit more.

So how is it splitting the share market?

Well, this is the fascinating bit. On the face of it, when interest rates are so painfully high, the equity market should have the jitters. Borrowing costs are higher for corporates, and investors would normally be thinking about taking some money out of equities and investing in bonds because of the much more attractive yields on offer. But the American market is at record highs, and then you dig under the hood, and more than half of the broad American market. So that's roughly, say, 1,500 companies out of the Russell 3000 are down more than 20% from their summer peaks, which is actually bear market territory. So the broad, broad market is reacting to these higher interest rates. And that brings us back to something you and I have spoken about many times, how narrow and concentrated this rally is. Essentially, a handful of AI winners are holding the index up.

Yeah. Now, what do you think this means for investors?

I think it's one to keep an eye on because, and this is a little bit sobering, is because throughout history, the market has only been this narrow while at record highs a small handful of times. So the 1970s and then 99, 2000. It just serves as a reminder to investors that may be invested in passive index funds that think they are diversified.