Market Pulse
Friday, February 21, 2025
Welcome to this week’s Market Pulse, your 5-minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team.
Today, we’re looking at multi-asset ETFs, the UK’s budget strategy, and British defence spending.
But first, our number of the week…
That’s the approximate spread between the current yield on 10-year German Bunds (2.5%) and 10-year US Treasuries (4.5%). This spread has been rising steadily in recent months, up from about 150 basis points in September.
Sidekick Takeaway: Optimists might look at this spread and conclude that Germany’s government is being rewarded for decades of fiscal discipline with ultra-low borrowing rates. More realistically, however, this widening spread is likely the result of diverging growth expectations between Europe and America, with markets forecasting quicker rate cuts by the ECB.
Now to our main stories…
Only have a minute to read? Here’s the TL;DR:
It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.
Over the past decade, ETFs have become hugely popular as an investing tool – and for good reason.
Not only do ETFs offer better liquidity than traditional funds, but they often feature lower fees as well.
Historically, most ETFs have focused on just a single asset class. Multi-asset ETFs currently hold just $50 billion in investor funds out of a $15 trillion universe.
A new JPMorgan fund, however, is bucking the trend with an all-in-one portfolio solution.
What’s different about the new JPMorgan ETF?
JPMorgan’s Flexible Income ETF (ticker JFLI) will hold a portfolio consisting of 75% stocks and 25% bonds.
It’s not just JFLI’s multi-asset approach that’s unusual – unlike 93% of ETFs, the fund will be actively managed.
It remains to be seen whether JPMorgan’s new offering gains traction. In our view, however, this approach is heading in the wrong direction:
Diversifying your exposure across multiple asset classes is smart investing. Doing so within a single fund, however, often means sacrificing the flexibility needed to create a truly personalised portfolio.
Amidst rising gilt yields and a lukewarm economy, the UK government’s finances have been under increasing pressure.
Chancellor Reeves has repeatedly emphasised her commitment to balancing the budget and adhering to the government’s fiscal rules. Unfortunately, the only way to do so may be with painful spending cuts.
Recently, however, strategists at Barclays have argued for an alternative measure that may give the government more breathing room: drastically reducing the amount of longer-maturity debt issued.
Reducing long-maturity debt could cut interest bills
Currently, the UK yield curve is ‘normal,’ meaning that longer-dated gilts earn higher rates than shorter-dated ones (for example, 4.3% for the 2-year vs. 4.6% for the 10-year).
This means that the government could cut its interest bills by issuing relatively more debt on the short end of the yield curve:
While more short-dated gilt issuance may offer the government greater spending flexibility, it’s no free lunch.
Critically, more short-term debt may increase long-term costs if the government needs to refinance that maturing debt at higher rates in just a few years.
With the BoE looking increasingly cautious about aggressive rate cuts this year, this isn’t a risk that the government can overlook.
In an article published this week, UK Prime Minister Keir Starmer stated for the first time that the government was willing to deploy British troops to secure a peace agreement in Ukraine.
The commitment comes at a tense time in the peace process. Despite American insistence that Europe shoulder more of its defence responsibility, the US is currently negotiating with Russia to end the war without Ukrainian representation.
UK defence stocks like BAE Systems jumped on the possibility of increased British defence spending. The firm’s CEO confirmed that BAE “would be ready” to meet a surge in demand.
Increased defence spending may end up clashing directly with the government’s fiscal rules, however.
The UK should consider defence spending an investment
Under Chancellor Reeves’ budget framework, the government is only to borrow to pay for long-term investments like infrastructure.
This would make it challenging to fund increased defence spending, which is typically considered a day-to-day expense. Under the current rules, defence spending would need to be paired with sizable tax increases.
There is, however, a better alternative: Reeves should create an explicit carve-out for defence spending as an investment.
Such a rule would make it possible for the government to tap the gilt market to fund increased defence expenditures. This is a smarter solution than trying to address new challenges with a dated framework.
There is already meaningful precedent for this idea. Notably, France’s government recently expressed support for joint European defence bonds to fund the continent’s security, while the EU Commission proposed exempting defence spending from state budget caps.
In the current environment, there is no doubt that increased defence spending is an investment in the UK’s long-term security. The government’s fiscal rules should recognise this reality.
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𝘗𝘭𝘦𝘢𝘴𝘦 𝘳𝘦𝘮𝘦𝘮𝘣𝘦𝘳, 𝘪𝘯𝘷𝘦𝘴𝘵𝘪𝘯𝘨 𝘴𝘩𝘰𝘶𝘭𝘥 𝘣𝘦 𝘷𝘪𝘦𝘸𝘦𝘥 𝘢𝘴 𝘭𝘰𝘯𝘨𝘦𝘳 𝘵𝘦𝘳𝘮. 𝘠𝘰𝘶𝘳 𝘤𝘢𝘱𝘪𝘵𝘢𝘭 𝘪𝘴 𝘢𝘵 𝘳𝘪𝘴𝘬 - 𝘵𝘩𝘦 𝘷𝘢𝘭𝘶𝘦 𝘰𝘧 𝘪𝘯𝘷𝘦𝘴𝘵𝘮𝘦𝘯𝘵𝘴 𝘤𝘢𝘯 𝘨𝘰 𝘶𝘱 𝘢𝘯𝘥 𝘥𝘰𝘸𝘯, 𝘢𝘯𝘥 𝘺𝘰𝘶 𝘮𝘢𝘺 𝘨𝘦𝘵 𝘣𝘢𝘤𝘬 𝘭𝘦𝘴𝘴 𝘵𝘩𝘢𝘯 𝘺𝘰𝘶 𝘱𝘶𝘵 𝘪𝘯.
