The music will stop - but when? There are no strong signals of a global recession, says HAMISH MCRAE

Stay invested or bunk out? And if you do sell your shares, where do you go? It’s a twitchy, troubling time for anyone wondering what to do with their savings.

The market keeps hitting highs, and that has rescued the portfolios of the many investors who bought into the American dream.

The message on Friday from UBS, the Swiss financial group that is on most measures the world’s largest wealth manager, is to ‘stay invested’.

But there are plenty of experienced investors who feel it’s time to row back, notably Ray Dalio, who created the world’s largest hedge fund, Bridgewater Associates.

He warned that we’re nearing a point where the AI bubble may burst, and rising bond yields are likely to put pressure on equities.

‘We are in a bond bear market, that’s, I think, pretty clear, and I think that there’s more to go would be my guess,’ he told CNBC last week.

Investment this year in bonds has been a disaster, says Hamish McCrae

But – and this is important – he is not yet predicting a decline in US company earnings, or an immediate stock market correction.

So where are we in this cycle? As Fred Astaire sang to Ginger Rogers in Irving Berlin’s 1936 film Follow the Fleet, ‘There may be trouble ahead’.

But for the moment at least, the markets are following the thrust of the song’s next two lines: ‘But while there’s moonlight and music and love and romance, let’s face the music and dance’.

It’s worth quoting because of an uncomfortable echo. In July 2007, Chuck Prince, then chief executive of the New York bank Citigroup, declared: ‘When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.’

That was just three months before Northern Rock had to be rescued, an early warning of the cascading banking collapses – and the rescues – that followed around the world.

Citigroup itself was saved by the US government, which took a 36 per cent stake in the company in 2009 and eventually managed to sell it for a decent profit.

You see the point. History doesn’t repeat itself with any precision, and the world’s banking system is much more robust now.

But government finances are weaker just about everywhere, bond yields and interest rates are climbing, and while corporate earnings in general are strong, we all know the music will stop.

In past cycles, the appropriate reaction would be to de-risk portfolios by rebalancing from equities to bonds.

But that doesn’t work this time. Investment this year in bonds has been a disaster, while even so-so equity markets such as our own have not performed too badly.

The FTSE 100 index is up 6 per cent on the year and you’d add a bit for dividends, whereas if you had bought 10-year gilts, even allowing for interest payments, you’d be about 6 per cent down.

So what do you do? Everyone’s circumstances are different, but for long-term investors who won’t need cash in the near future, the UBS point that you should stay invested is not a bad one.

It’s impossible to time the top, and if you do get out of the market, it’s jolly hard to know when to get back in.

So yes, diversify a bit away from the sectors that seem most fashionable, and keep some cash so that when there is a correction you can take advantage.

But there are no strong signals of a global recession, and when you think of everything that has been thrown at the world economy over the past couple of years, that’s most encouraging. Global businesses have proved to be tough old beasts.

There’s something else at work. We’re in the early stages of the great wealth transfer. That’s money being passed from the older baby boomers and the so-called silent generation to Generation X. It runs into trillions.

Much of that wealth will be reinvested, but quite a lot will be spent.

So, while incomes will be squeezed by higher interest rates, and almost certainly by higher taxes, it’s hard to see a deep recession in the next couple of years at least.

The Footsie still offers value. It’s a sterling-based bet on the world economy.

Boring? Well, yes, it’s not dancing. But right now I suggest boring is best.

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