After a great start to the year, what should the second half of the year look like on the stock markets? We asked Jean-Marc Turin, Head of Fund Management at Degroof Petercam. Here is his analysis.
The American stock market remains, by far, the main driver of the markets. Is there not, today, an extreme dependence on a few stocks, these “Magnificent Seven”, even the “Magnificent One”, Nvidia, which set the tone on the markets? Isn’t this mad race for AI (Artificial Intelligence) exaggerated?
This is obviously the million dollar question. The truth is that no one knows the answer. But there is no doubt about the potential of AI and what it can bring in terms of productivity gains for a whole range of businesses.
Today we are focusing on American technology. But AI will bring colossal productivity gains in most economic sectors. This is what obviously justifies the current craze. For the moment, the market is indeed super concentrated: around 35% of the rise in the S&P 500 comes from Nvidia alone. Because to be able to use the potential of AI, a whole series of players, including Microsoft, must invest a lot. And to invest, they buy Nvidia chips.
Nvidia, the best performing title among the “Magnificent Seven”, ahead of Meta’s record
So, if we want to “play” AI on the stock market, the most natural way is to do it through Nvidia. Obviously, the question is: how long will this last? But what must be emphasized is that Nvidia, but also the American Big Tech, have outperformed the market because they have recorded higher profits than the rest of the market.
Is there a risk of a financial bubble, like after the arrival of the Internet?
We cannot compare with what we saw in the 2000s. All Internet stocks exploded because their valuation multiple skyrocketed. Here, these companies outperform because their earnings are better than the rest of the market. This doesn’t mean this will continue forever. No doubt that Nvidia’s results, which have multiplied by 4 or 5 in some time, will not continue to progress at this rate. But as investors, we must have such values, otherwise we risk missing out on the biggest pocket of current performance. Aware that this cannot last forever, we do not bet everything on these values and remain diversified.
guillement“There are plenty of champions and very good values in Europe: LVMH, Schneider Electric, ASML, Air Liquide….”
Do you think that in the long term, AI will also drive up the price of many stocks, in sectors other than technology?
Yes. In the economy and in the markets, productivity gains mean more growth. But that takes some time. Sometimes, we overestimate a little the implications that this will have in terms of productivity gains in the short term. But, on the other hand, we generally underestimate them in the long term. In the long term, the development of AI is a major element. Many sectors of activity will really be able to do better, or do as well with fewer resources, because there will be efficiency gains. And that will be reflected in the prices.
The American stock market is very “expensive” today: the average valuation of shares represents about 20 times the profits of listed companies. Isn’t this another risk of a bubble?
We are indeed at very high levels. But if we look at things a little more finely, we see that the tech sector is pushing the average strongly upwards. Furthermore, the United States has been more expensive than the rest of the world for some time now… but it has been outperforming global markets for 5 years.
Is Wall Street already looking ahead to the presidential elections next November?
Right now, it’s not the US election that’s setting the tone for the market, it’s interest rates and AI. But this topic is going to start to gain traction.
For the markets, there is no good or bad candidate. The United States has growth that is really stronger than in the rest of the world, but this growth is accompanied by deficits that are also very high. It is a choice. The Americans decide to invest in new technologies, in the transition. When we look at the programs of the two candidates, neither seems very concerned about the deficits. But if the trajectory of the American debt continues at this rate, this will have implications on American rates, which will fall less quickly than if there were more budgetary discipline and a desire to reduce spending. Furthermore, candidate Trump appears to be a little more “inflationary”, with the customs duties and the country’s withdrawal into itself that he wants to implement. That said, Donald Trump showed, when he was in power, that he was also relatively pragmatic. The economy was not that bad during his first term, on the contrary.
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Europe continues to lag behind on the equity markets. Is this due to the structure of its economy?
There are plenty of champions and very good stocks in Europe: LVMH, Schneider Electric, ASML, Air Liquide…. We are happy to have European stocks in our portfolios. And they are trading at valuation multiples that are not so different from what we have in the United States, excluding technology. But overall, the European market is much cheaper than in the United States, around 14 times corporate earnings. Part of the difference simply comes from the composition of the index which is different, with less technology. And there are other elements: Europe is not energy independent, unlike the United States. And decision-making in Europe is always very slow. Therefore, we can see that for a whole series of important issues, Europe is increasingly on the balcony for issues that are decided between the United States and China.
guillement“In emerging markets, there are now two engines, not just one, which was China, but these two engines are still very different.”
Has India taken China’s place as the most promising emerging market for the future?
In any case, India is the market with the best performance, by far, among emerging markets. It is the fastest growing economy almost globally. That said, the Indian market is rather expensive because growth expectations have come true.
This contrasts with China, Chinese stocks are extremely low and the question is: is this justified or not? This is partly because there is a risk premium on China which will remain due to geopolitical tensions (the situation in Taiwan, etc.) and certain measures taken by the authorities, which we see do not hold up. always take into account the interests of shareholders. But, on the other hand, there is a lot of bad news that is in Chinese stock prices. And from a stock market point of view, when bad news is in the news, it is sometimes a good entry point for investors. So I think there is room for a rebound in Chinese stocks.
Whether India will replace China as the number one emerging market is another matter. It is true that India’s weight in the emerging markets index has gone from 6 to 7% a few years ago to 18% today. And at the same time, China’s weight has gone down from 40% to 25%. So, it is rebalancing. So in emerging markets, there are now two drivers, not just one which was China, but these two drivers are still very different.
