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This article was originally published in The Telegraph.

KNOWING when and where to invest is never straightforward. Things only look obvious with the benefit of hindsight. But rarely have investors had such a harsh reminder of the perils of market timing and the difficulty of asset allocation as they did in the first half of 2023. It has been a tale of the unexpected. 

The last six months have made fools of some smart people. In particular, three of the world’s main stock markets have confounded expectations. And not just by a bit. There has been a yawning gap between the winners and losers. And the direction of travel has been different from what you could sensibly have predicted six months ago. 

Take the hands-down winner in the first half of the year, Nasdaq. The tech-heavy US index rose by 32% between January and June. That was its best first half performance since 1983 and the best in any half year, first or second, since the explosive final months of the bubble in 1999. 

It was not unreasonable to expect a rebound after the terrible performance by the US stock market in 2022. The Nasdaq index bore the brunt of last year’s slump as interest rates rose more quickly than expected. But no-one was predicting the rally we have seen year to date. 

Rising interest rates are particularly problematic for the kinds of growth-focused companies that Nasdaq specialises in. They slash the value in today’s money of tomorrow’s profits. That’s bad news for businesses which are expected to enjoy high levels of growth long into the future. 

Back at the start of the year, two other factors argued against a strong performance by the US’s leading growth shares. Analysts’ expectations for corporate earnings were already falling as the impact of tighter financial conditions started to be priced into forecasts. And valuations were already higher for US stocks than for their peers around the world. 

So, the extraordinary performance of American tech stocks must be attributed to a combination of excitement about artificial intelligence and the expectation that the Federal Reserve won’t have the stomach for keeping rates as high as it says it will. Investors are counting on no recession and a rapid return to growth. 

The second big surprise for investors has been the dreadful performance of Chinese shares. In contrast to the US market, the outlook in Shanghai, Shenzhen and Hong Kong was uniformly positive at the turn of the year. Shares had started to rally in the autumn, after the People’s Congress, and the Chinese market had momentum on its side. 

The positive case had three legs, all of which have been kicked away in the subsequent six months. Investors expected a thawing in relations between China and the US. They hoped for a burst of ‘revenge spending’ after President Xi unexpectedly called time on Covid restrictions. And, if all else failed, they thought Beijing would resort to fiscal and monetary stimulus as it generally has in the years since the financial crisis. 

As often happens, the moment of peak optimism about these various factors was also the point at which the stock market headed the other way. Chinese shares have now fallen about 20% from their peak in January and investors are starting to ask if there is a way for them to cut the world’s biggest emerging market out of their Asian portfolios. 

What has actually happened this year is a continued escalation of the stand-off between China and the US, a failure of the Chinese consumer to show up in the same way as her counterparts did in America and Britain after the pandemic, and government resistance to further stimulus. Chinese shares ended June 5% lower than they started the year. 

The third market to defy expectations has been our own. At the start of the year, UK shares had enjoyed a rare year of relative outperformance. Thanks in large part to the FTSE100’s heavy weighting to energy stocks and other defensive sectors like pharmaceuticals, we managed to dodge the downturn in 2022. And with UK shares looking cheap, both against their own history and compared with rival markets, there didn’t seem any good reason why that should change.  

But we seem to have a knack for suffering from everyone else’s problems while at the same time finding some more things to worry about just for ourselves. Inflation is not an exclusively British challenge, but it is clearly higher and more persistent here than anywhere else. Perhaps unsurprisingly, global investors now have a preference for the rest of Europe over the UK. 

With its economically sensitive energy and commodity stocks under pressure, and few ways to play the AI technology story, the London market has gone nowhere this year. In 2022, drifting sideways looked commendable. This year the market has not even managed to keep up with cash, let alone inflation. 

The divergent performance of these three markets so far in 2023 may be extreme but it is not unusual. Most years, there is a big dispersion between the best and worst assets or regions. And invariably the league table at the end of the year is not what most experts predicted at the outset. 

Unfortunately, our periodic investment successes have the same impact as that good drive on the 18th at the end of an otherwise indifferent round of golf. It’s enough to keep us coming back the following week for more. 

The longer I do this, and the more I observe unexpected outcomes in the markets, the more I recognise the wisdom of hackneyed but accurate truisms about investing. You can’t time the market consistently well. You can’t tell ahead of time what will win and lose. Even if you know that things will revert to the mean, you can’t know when it will happen. 

The best way to have played the last six months would have been to have put your eggs in a very wide variety of baskets. As is often the case, the winners won by a wider margin than the losers lost.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice. 

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