WeeklyWatch – Big tech companies are a dominant driving force in global markets

27^th February 2024

Stock Take

NVIDIA helps Japan’s Nikkei 225 Index make huge strides

It took Wall Street 25 years to recover its losses after the 1929 Crash and Great Depression. This record was broken in the last week by Japan’s Nikkei 225 Index as it surpassed its 1989 high.

Over the last 34 years, Japan has grappled with deflation and very little, if any, economic growth. However, this does not mean all is well just yet. At the end of 2023, the economy unpredictably went into recession. But corporate governance improvements and booming earnings, aided by the weakness of the yen, served as incentives for foreign investors to pump $42 billion into the equity market over the course of the year.

The Nikkei is currently in excellent form: it’s already up around 17% in 2024 and gained 28% in the previous year. In China and Hong Kong, bourses have underperformed, which has also enticed investors towards Japanese stocks.

The impressive results and forecast announcement from NVIDIA – the world’s most valuable chip maker that’s leading the artificial intelligence (AI) revolution – was the catalyst for the Nikkei’s record high. Revenues soared by 265% in three months to the end of January for the tech giant, and turnover for the full year doubled to $60.9 billion. The company predicts an outstanding first-quarter revenue growth of 233%.

NVIDIA Chief Executive, Jensen Huang, declared:

“Generative AI has ‘hit a tipping point’.”

Gains across the tech companies

NVIDIA didn’t stand alone in success. Over in the USA, the S&P 500 surpassed its record high that was set the previous week. Amazon and Microsoft made significant gains, and the Stoxx Europe 600 surpassed its previous peak.

In 2024, the S&P 500 has gained more than 7%, with NVIDIA being responsible for a quarter of that return. The small margins in leadership within these recent successes have given rise to concerns that excessive exuberance over the AI theme has left stocks and indices approaching ‘bubble’ territory, particularly in light of the challenging economic backdrop.

This has led to comparisons to the tech-driven success of the late 1990s; however, there are some key differences. Firstly, the dramatic gains made during that time were in unprofitable dot-com companies, which had encouraging growth possibilities but had an unsustainable earnings base. In comparison, NVIDIA, Microsoft, Alphabet, Amazon and Meta generated a quarter of a trillion dollars in earnings in 2023.

With these staggering numbers to hand, investors had less news to mull over before NVIDIA’s announcement midweek and, because of school breaks and a Wall Street holiday on Monday, the start of the week’s trading was quiet.

China’s property market woes and the Lunar New Year

In a drastic attempt to revive the struggling property market, China has announced its biggest-ever cut in its benchmark mortgage rate. But reporters argue that prospective homebuyers are more concerned about the risk of developers going bust and house prices falling, rather than the high mortgage costs. The move hinted at a renewed effort by authorities to keep the markets supported, but in the meantime, investors are having to wait for more considerable measures in order to boost consumption and create a more stable foundation under property prices.

In more encouraging news, over the Lunar New Year break, official data revealed that tourism spending leapt above pre-Covid levels – up 47% compared to the holiday period the previous year. The Lunar New Year is also known as the world’s largest annual migration, where the Chinese get together with their families or visit tourist attractions. During this time, 474 million domestic trips were made and more than 61 million train journeys were taken.

Growth struggles across Europe

Looking closer to home, Bank of England governor Andrew Bailey, in his speech to a committee of MPs, said:

“The UK’s recession may already be over. By historical standards, this is the weakest recession by a long way. An imminent interest rate cut is unlikely, and the Bank needs further evidence in areas such as wage growth and the number of job vacancies to show that inflation had decisively turned.”

Reports from The European Central Bank (ECB) stated that in the final quarter of last year, there was slowing wage growth across the euro area. It highlighted wages as the largest risk in its struggle to get inflation under control. Even though inflation came down quickly and stands just below 3%, the ECB had said that despite a record number of interest rate hikes and slow economic growth, getting inflation to their 2% target could take over a year.

In Germany, the Bundesbank has announced that the country is also likely to be in recession. Despite German industry and its heavy economy being the biggest in Europe, the country has faced hardship with high energy costs, weak Chinese demand and escalating inflation. The concerns were consolidated when the German government completely changed their forecasts for economic growth from 1.3% to 0.2%. But it wasn’t all bad news, as the German DAX Index ended the week at a record high.

Wealth Check

It’s easy for any investor to get entangled in the up-and-down rollercoaster of market behaviour. But trying to understand the psychology that supports investing patterns can make money less emotive and lead to a clearer head when it comes to better financial decisions.

Evolution is a key factor in explaining why we feel so strongly about our finances. The human brain is well-adapted to identify and react to threats that we faced thousands of years ago. Our responses to immediate physical or physiological changes in our situation determined our ability to survive – otherwise known as the ‘fight or flight response’. Many years have passed since then and we live in a different age, but those same instincts that ensured our survival back then can be the reason that we make bad decisions today.

Behaviour finance expert Dr Daniel Crosby has described it as:

“Asking a 150,000-year-old brain to navigate 400-year-old financial markets.”

He has noticed four common ‘mistakes’ or biases that can meddle with thought processes; these include: overconfidence or ego, emotion, attention and conservatism.

When it comes to investing, overconfidence has the potential to make people overestimate their comprehension of the stock market or specific investments. Emotionally driven thinking can significantly influence our perception and impact our ability to accurately balance risk against reward. Knee-jerk reactions or overreacting to short-term hype is called ‘attention’ by psychologists. We risk placing too much focus on what’s happening in the immediate present and therefore become out of touch with longer-term goals. However, at the other end of the scale, playing things too safely can make people avoid less familiar investment options and take less investment risk overall.

Ultimately, all financial investments carry risk to a varying extent, but understanding your attitude towards this risk is an important part of financial planning. Financial advisers and professional fund managers are trained to understand the impact of these natural biases and are able to work to mitigate risks. As part of this management, investments are spread across a range of proficiently managed funds, rather than relying on hefty investments in much fewer options.

Past results are not a baseline for future outcomes.

The value of an investment with St James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. It is possible that you may get back less than the amount invested.

The Last Word

“The vehicle is stable, near or at our intended landing site. We do have communications with the lander.”

• Stephen Altemus, CEO of Intuitive Machines, reveals the company’s moon lander, Odysseus, is ‘alive and well’ after landing on its side, marking the first private spacecraft ever to land on the moon.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

Source: London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group”). ©LSE Group 2024. FTSE Russell is a trading name of certain of the LSE Group companies.

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© S&P Dow Jones LLC 2024; all rights reserved.

Source: MSCI. MSCI makes no express or implied warranties or representations and shall have no liability whatsoever with respect to any MSCI data contained herein. The MSCI data may not be further redistributed or used as a basis for other indices or any securities or financial products. This report is not approved, endorsed, reviewed or produced by MSCI. None of the MSCI data is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such.

 

SJP approved: 26/02/2024