The first six months of the year were marked by a remarkable performance by stock market indices, despite a gloomy macroeconomic context. Behind this performance lies an unprecedented concentration.
The so-called “Magnificent 7” (Apple, Microsoft, Google, Amazon, Tesla, Meta and Nvidia) have posted an equally weighted performance of over 50% since the start of the year. The “S&P 493”, i.e. the US flagship S&P 500 Index minus the “Magnificent 7”, has returned just 2%, showing beneath the surface that the bulk of the market is lagging. In Europe, the same phenomenon can be observed, with three stocks (ASML, LVMH, SAP) together accounting for half the performance of Euro Area equities since the beginning of the year.
The first trigger was the launch of ChatGPT in November 2022, followed by astronomical results from Nvidia, which in one trading session saw its market capitalisation jump by USD 150 billion, joining the very exclusive circle of companies that have surpassed the one trillion-dollar capitalisation mark. Artificial Intelligence (AI) has thus become the number one topic for investors. While the technology and the revolution it brings are indisputable, it is evident that investors are prepared to pay and overpay very heavily for any company that joins this movement. This month, Nicolas Mougeot shares with us a fascinating article on the subject (Focus, page 4). The debate is raging: is this a new bubble? Or is it an epiphenomenon similar to the excitement surrounding the ‘metaverse’ last year? Whatever the case, a handful of companies will be the big winners, but many others will be at risk. At 200 times its current profits and 40 times its annual sales, these figures for Nvidia leave no one indifferent, and it’s hard to imagine how the company could do better: put another way, the slightest misstep will be painful.
On the macroeconomic front, US growth is holding up well, with the consensus adjusting upwards and aligning with our forecasts. US inflation continues to fall, reaching 4% year-on-year (YoY): the Federal Reserve (Fed) could be pleased about this, but to everyone’s surprise, it is now referring to core inflation (excluding energy and food prices) as being too high and has resumed a restrictive tone on its monetary policy. This is not a pause, said Mr Powell, but a “skip”. The two pre-announced hikes by the Fed are not convincing the market, or us: a single hike is expected in July, followed by a plateau. The direct consequence of this is an even more inverted yield curve: with short-term interest rates becoming even more attractive. In our view this is still the most attractive part of rates for investors, with long duration to be avoided. However, entry points will materialise, and we will be on the lookout to position ourselves.
The surprise of the last few weeks has come from China: figures showing that the economy is running out of steam have prompted the central bank to cut interest rates, and the market is beginning to consider supportive fiscal measures. We remain positive on Asia and Chinese equities for three fundamental reasons:
1- the valuation level is close to 10x future earnings (compared with 20x for US equities) with positive earnings growth of over 18% expected,
2- more fiscal and monetary support to come,
3- the market is under-owned by global and domestic investors.
Ultimately, investors like to buy what is going up: this is known as momentum. Given China’s underweight position, any turnaround could have a significant momentum effect and see the market catch up.
I hope you enjoy reading this issue, in which we return to the impact of monetary tightening on the real economy and the markets, even though the explosion of the AI theme has overturned the traditional correlation between long-term rates and growth stocks.
Monthly House View, 22/06/2023 - Excerpt of the Editorial
July 03, 2023