People were asking us on our webinar in July how the newly elected Labour Government would impact our investments and we rightly focused on tax rather than big investment market changes. There was a nod to the unfolding election in the US.
In July it has been events in America that have moved markets and it’s been an
extraordinary month. On the 13th Donald Trump survived his assassination attempt by about an inch and, never missing a photo opportunity, became the shoe-in favourite for the next US President. Big caps continued to rally.
On the 16th a weaker US inflation print increased the likelihood of base rates cuts in the US. The dollar weakened, and areas of the stock market particularly hit by high interest rates started to rally. Real estate, small caps and private equity, which have all been under pressure from the higher cost of money started to rise. Could there be a rotation from mega caps to other areas of the market? It is well overdue.
On the 22nd both Trump and Biden laid in on China and Taiwan, hitting the big semiconductor manufacturers like Nvidia and TSMC. These companies, already showing rally fatigue, fell heavily. Around $300bn was wiped off the value of Nvidia in 24 hours. That’s about two Shell PLCs of value in English money, showing what goes up fast can also come down fast!
Last weekend Biden handed the baton over to Kamala Harris. As had been suggested a week or two earlier by one of our more politically savvy clients, the Democrats may well have been waiting for Trump and his running mate to be ‘nailed in’ as the Republican candidates before this happened. It has certainly upended the race to the White House. 78 year old Trump, who will be 83 by the end of his second term in office should he be elected, and his Convention crowd pleaser, 70 year old Hulk Hogan have spent the last few weeks and months assuring Americans how fit, young and agile(??) they are. Of course, in comparison to poor old Joe Biden, they were making hay with this strategy. Now they face an opposition 20 years younger and undoubtedly requiring less hair and make-up before facing the cameras!
Then on Monday after the US market close, Tesla and Alphabet’s Q2 earnings reports fanned the flames further. Tesla announced a 45% year on year profit decline as its margins dropped from around 9% to 6% in an ever more competitive electric vehicle (EV) market. It fell 13% in the next two days. Again, talking to a Tideway client working in China for a Chinese car manufacturer last month, he was incredulous at Tesla’s recent rally. He was very clear the sub $25,000 Hybrid/ EV is on its way and it might well be quite a lot cheaper than $25,000. But it’s not coming from Tesla! Only Western Government imposed import duties, it would appear, have any chance of stopping a mass extinction event in US and European affordable car manufacturing, on par with the demise of British motor bike manufacturing at the hands of the Japanese in the late 1960’s.
In all of this July 16th marks the end of the S&P 500’s recent run with a sharp 5% correction following in just a few days.
S&P 500 Year to Date Returns in USD
Source: Yahoo Finance 26th July 2024.
Only time will tell if this is just a bump in the road or the start of a bigger correction. Next week we will see earnings from Amazon and Microsoft which could be critical on where we go from here.
The enthusiasm for Artificial Intelligence (AI) in recent months coupled with the blind rush to buy index funds, could be at the heart of any mispricing if it is shown to exist.
Is AI just a convenient acronym for the next leg up in the evolution of digitization and computer usage? Or is it going to make us all more profitable and lead to new profit sources from so far uncharted business activities to support the lofty valuations of some companies?
Talking recently to one particular client working in investment research, and with Nick Gait, our investment director, they are both seeing the investment management industry embracing the newly available technology at a rapid rate of knots. So far it’s not that easy, but if you throw money (quite a lot of money) at it you can see where we are heading.
As an example, Nick reports that several of our fund managers have invested heavily in the latest technology offerings, the analysts are now recording every meeting with target businesses they are considering investing in. Those interviews are then being stored digitally and summarised using a large language model, this is the AI bit, such that the analysts can retrieve financial data points and specific topics discussed from many meetings at the click of a button. It’s very cool to see in action I’m told.
But here’s the thing, no one it appears is losing their job which would save costs, new assets won’t necessarily be won in the short term as a result and only time will tell whether it helps or hinders their analysts to make better investment decisions. That would of course attract more investments if it does. What it has done is reset the bar, quite a bit higher in terms of their analytical processes. AI application like this will have to be embraced by business just to compete, but it’s not clear this is going to make firms embracing AI more profitable. This was the view of our client, it is definitely happening and whether we like it or not we are going to have to embrace it to compete, but whether it will make businesses more profitable, on that the jury is still out.
So, it looks like we will all be spending more money on computing, which will no doubt justify the values of some of the picks and shovels, the likes of Microsoft and the semi-conductors.
What about new uncharted business profits? Tesla and Elon Musk are at the heart of that question. For sure the current Tesla valuation cannot be sustained as an EV manufacturer, nor likely as a battery manufacturer. Tesla’s shareholders now have to believe in Tesla and Elon as an ‘AI leader’ and from what I read that means in humanoid robotics, and driverless cars. These like Apple’s new £3,000, 0.6kg, virtual reality (VR) headset will face some huge challenges before broad consumer adoption. VR headsets first became a thing in 1990, and whilst many applaud the new Apple device, most recognise, that in its current form, it’s a bit of a gimmick. It’s just still not good enough to have widespread appeal like the highly profitable Apple smart phone.
Tideway portfolios are well placed to deal with current events in equity markets. We have good diversification away from the overly concentrated indices and our fixed income investments are largely unaffected. Much like the tortoise in the fabled race with the hare, the fixed income funds keep moving along at a steady pace.
Nick looks further at this and our relative performance to our benchmarks below, but two quick asks from me:
1. I am quite keen to break the internet with my post on LinkedIn today for those of you who use LinkedIn and benefited from Tideway’s DB transfer advice, it would be great to get some reactions or better still reposts!
2. We are always keen to take on new clients and there is no better way than referrals from our existing clients, if you know of anyone looking for advice or unhappy with their current adviser we are always keen to help. Forwarding them this market update is often a good way to start such a conversation.
- The content of this document is for information purposes only and should not be construed as financial advice.
- Any rates of return used are for illustrative purposes only. Please be aware that the value of investments, and the income you may receive from them, cannot be guaranteed and may fall as well as rise.
- Any rates of tax referred to are correct as at the date of this document and may be subject to change in the future.
