August 2024
Dear Friends, Dear Investors,
As the saying goes, just when you thought things could not get any crazier (following June’s snap elections in France which resulted in a hung parliament), they did. In the span of two weeks, one US presidential candidate was lucky enough to escape an assassination attempt with just a piece of ear missing and the other candidate withdrew from the race and endorsed his vice-president, Kamala Harris. This decision has thrown the US election wide open again (before all this, it was clearly Trump in the lead), introducing yet more uncertainty in the markets.
On the equity front, July saw most of the Magnificent Seven report their earnings (except Nvidia, which reports in late August) and what we saw was something we have talked about at length: they are spending a lot of money on Artificial Intelligence (AI), tens of billion per quarter each with no clear sign of a return on investment. Obviously, that potential return will take time to show up and it’s probably the rational thing to do for each of these companies to behave that way, for fear of being left behind by their competitors. Every CEO mentioned that they would rather overinvest than underinvest in AI, but clearly that will take a toll on Free Cash Flow generation in the quarters ahead.
Last month, we mentioned the narrowness of the American markets, which means that only a few big companies were leading the markets higher, but most stocks weren't necessarily doing well. We were, then, rather on the side of the optimists who argued that participation could broaden again if Q2 earnings announcements were good across the board. And, it seems that this was confirmed. Although it is too early to speak of an important market broadening, profits were generally good and participation is clearly widening, with a sector rotation to the favour of stocks that were neglected in recent months.
This expansion should also accelerate more quickly than expected, following the earthquake all markets experienced at the beginning of August. We will come back in more detail on this episode in our next Newsletter, but we are taking advantage of this publication to already touch on a few words about it.
In a summer context of low liquidity on the markets, the downward movements were dizzying. Poor US economic figures were the trigger, but the main cause came from Japan. The decision of the central bank of Japan to increase its interest rate to 0.25% on July 31 had the effect of reducing the rate differential (carry trade) between the Yen and the USD. Speculators who took advantage of this attractive rate differential to borrow cheaply in Yen and invest in USD found themselves in an impasse and had to respond to massive margin calls. Around US$30 billion worth was unwound in a matter of days, wreaking havoc on most markets. Despite these extraordinary movements, the impact seems to be limited. Although volatility is likely to remain high for some time, the fundamentals remain good. We believe a recession in the USA is ruled out, for the moment, and the half-year profits were above expectations. As we write these lines, the markets are recovering positively and certainly offering new opportunities, with further widening in the long term.
Best regards,
Sinews Global team
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