Asia Shines - Tech Hot – Europe Doldrums – Stagflation Fear

Fri 28 Jun 2024

By Brian Dennehy

Access Level | public

Market commentary


quoteEvery other day the global BBC news bulletin has been telling us that Nvidia is the biggest company in the world, or fallen back to second, or returned to top slot.  It’s facile news, ignored by most listeners, but, sadly, it will suck in a few latecomers to the AI party.  It is aways thus as a bubble matures, when the least well informed get FOMO (fear of missing out), and, in this instance will typically buy a tracker fund.

If you are a passive investor, buying index trackers is not a terrible strategy.  But it will become a very expensive error if you have no realistic, factually informed, sense of the scale of losses which occur when markets are this over-valued e.g. falls in excess of 50%, or a decade of huge underperformance, or both.

Far too many of the global investors throwing money into ETFs tracking the S&P 500 have little or no sense of the risks which they are taking.  History doesn’t tell you when a bubble will burst.  But it does guide you as to the scale of falls when that moment arises, with no warning.

In the last 10 days Nvidia fell 16% in one 3-day stretch, and then bounced again, irrepressible.  This single company is responsible for one-third of the S&P 500 gain this year – most of the 500 companies making up this index have gone nowhere, and this dependence on Nvidia, and a small number of peers such as Microsoft and Amazon, should be concerning investors.

There have been some staggering, and some silly, anecdotes on the rise of Nvidia.  Its value is now greater than that of the UK, German, and French stock markets combined.  Then the silly one… Its value is now sufficient to buy enough gold to cover the Great Wall Of China, all 13,000 miles, with an inch thick layer of the shiny metal.

In the real world, the experience with AI is not so shiny.  In a recent global survey*, it was said “The honeymoon phase of generative AI is over… the initial euphoria has given way to a more measured approach.”  For example, 36% of the company executives surveyed are not increasing their spending on AI this year, compared to just 6% being curmudgeons in 2023.   The survey says only 25 percent of planned AI projects have been completed to date, and “the financial benefits of implemented projects have been dismal”.

Think of Nvidia like the guys selling picks and shovels to the gold prospectors in the California Gold Rush of 1849.  The pick seller makes a stack of money very quickly as prospectors rush in.  Then the gold runs out, or the prospectors run out of money or patience or both.  The pick seller then goes home or goes bust.  The “prospectors” buying Nvidia’s wares need patience and deep pockets to uncover the much-promoted benefits of AI – history suggests this will not happen quickly enough to prevent a collapse of the Nvidia share price.

Nonetheless, but for the odd wobble, right now the enthusiasm of investors for AI is undiminished, as you can see in this month’s What’s Hot? What’s Not, where tech has driven 9 of the top 10 performers.  In contrast, the EU elections have pulled down European funds, being 7 out of 10 of the worst performers.  The other three are gold funds.

Not surprisingly, Tech and India are hot sectors.  It is the appearance of two Asia sectors which particularly interests us.  Are global investors finally giving Asia the attention it deserves?  Perhaps.

Taking a longer view, there are a raft of opportunities, Asia undoubtedly, but also elsewhere:

“History highlights what sectors should work in the years to come e.g. Value investments, equity income, commodities… it is time to begin to embrace these sectors, as a multi-year theme.

Begin is the operative word, as these sectors are not immune from… a host of other risks ranging from financial to geopolitical and climate.”  (The Pieces Fall Into Place, Dennehy Wealth blog)

The profits from those opportunities will not just effortlessly fall into your lap, as they did for much of the last 40 years, and you will need to be on your toes.  Frankly the next 5 years will be challenging for the UK and the indebted West, whomever is in power. 

The volatility evidenced around global elections in recent weeks will remain at the centre of the new multi-decade cycle, particularly in the West.  Why?  The triggers are many, and here are just a few…

The dis-satisfied 99%; swings to political extremes; countries living beyond their means feeding unsustainable government debt, which will keep interest rates high and depress economic growth; higher taxes and spending cuts will be required to reduce government debt; economic nationalism will result in higher tariffs and higher inflation; unpredictable climate change will force migration pressure, economic disruption, and even more government spending; broadening geopolitical risk will trigger sharply higher defence spending; de-globalisation will force up inflation as “stuff” costs more if made domestically; increasing demand for commodities in low supply will push up inflation.  And, of course, the elephant in the room is the horribly over-valued US stock market bubble and associated investor mania – with participants at the tail end of two generations of investors who believe the stock market always goes up, but for occasional blips from which it always recovers. 

This mix of inflation and stunted growth is classic stagflation, the bete noire of policymakers.  It is a rare event, but the antidotes are both controversial and socially and politically divisive, as evidenced in Brazil and Kenya in recent weeks, and perhaps closer to home in France in coming months. 

Of course there is a magic solution.  Growth.  This is a stated objective of Labour (as it was for Liz Truss!). But there is deafening silence on the nuts and bolts of how this might be achieved.

Our journey with the new government begins next Friday.

*Between April and May 2024, Lucidworks surveyed business leaders in North America, EMEA, and the APAC region. Respondents were drawn from 1,000 companies with 100 or more employees across 14 industries, all of which are said to have active AI initiatives underway.


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