The rotation trade continues 

The transition continues, tech is out of fashion and most other things continue to do well. Global markets were overall up 1% in the month, with the strongest performance coming from Europe and particularly the UK (up 10% year to date) with markets falling back in love with old school manufacturers, miners and defence contractors. 

Technology continues to be hampered by the AI story – the big hyper scalers are investing too much (according to the market) and the smaller tech companies will be run over by AI.  The Nasdaq ended the month down 3%. 

*Source: Factset: Kōura returns are pre-tax and post-fees. Returns over 12 months are annualised. Local market returns use the relevant markets indices; NZ Equities uses NZX50 index; US Equities uses S&P500 index; Rest of World uses MSCI EAFE Index; Emerging Markets uses MSCI Emerging Markets Index, Fixed Interest uses Bloomberg Aggregate NZ Composite Bond Index. Bitcoin return is the USD change in price of Bitcoin. The return for an Aggressive Portfolio represents the equivalent of 95% growth and 5% income assets investing in core Kōura Funds. The return for a Growth Portfolio represents the equivalent of 80% growth and 20% income assets by investing in core Kōura Funds. Returns are calculated by Kōura. Past performance is not a reliable indicator of future performance. Returns are not guaranteed, and investment values may fluctuate over time.  

A continued rotation away from Technology 

Technology continues to make investors nervous. Whether it be high valuations, outlandish capex forecasts or disruption from AI, technology has gone from the market darling to the market laggard over the past few months.   

Early in February Claude announced it had released coding tools that make it possible for anyone to create new programmes.  The old SAAS days of building a product and then selling it for years appear to be dead now that companies and individuals can rebuild products within days using AI. 

The large hyperscalers are also making people nervous, after announcing $600 – 700 billion of capex for AI spend markets are nervous that they are overspending and will struggle to get a return on that capex. That combined with the persistent valuation concerns mean that most of these large tech companies are now down 10-20% from their Q4 peaks, with Microsoft being the worst hit down almost 20%.   

Asia is the new place to play the AI theme

The Korean and Taiwanese stock markets are up 56% and 23% respectively this year. The strength of the markets is due to the demand for AI components – Taiwan and Korea are the largest manufacturers of memory and processing chips that are so critical to the ongoing build out of AI.

During every bubble in the past, it has always been best to buy the components – the most profitable part of the Californian gold rush was the sale of shovels and blankets rather than actually mining the gold. The sale of memory chips is the equivalent to the picks and shovels of the mining boom.

NZ OCR announcement is a double-edged sword

The new RBNZ Governor gave her first press conference in the month and pushed cold water on the idea that we are due an imminent OCR hike. Her view is that the economic recovery is starting to take affect though there is still ample capacity in the economy, so she does not want to be stifling demand.

This is great news in that it means interest rates will stay lower for longer, though on the flip side, higher interest rates mean a stronger economy, and we would all love a stronger economy right now.

As I have said for the past few months – I think the economy is still at a risky junction. Rural and Agriculture prices are at record highs (though they only make up 5% of the economy) and general activity is picking up - retail sales, hospitality are all busier than they were last year. The big question remains – can we have an economic recovery without a housing recovery? I am slightly sceptical of this.

The muted reaction to Iran has surprised us

We are writing this on Tuesday 3rd March. Markets have reacted surprisingly positively to the Iran war so far, Oil is only up 7% and markets are slightly up. This is not what was expected given the scale of the Iranian reaction and the consistent message that the Strait of Hormuz is closed.

We had expected higher oil prices and a stronger market reaction – markets clearly believe that the war will be resolved quickly without any long-term disruptions to shipping or oil markets. Personally, I think it is a bit early to be making this bet.

Bitcoin continues to tread ground while gold hits all-time highs

Bitcoin fell all the way down near US$60,000 before staging a very small recovery and is currently trading just under US$70,000.

Unlike other crypto winters, there is no real catalyst for the current Bitcoin price crash. We haven’t seen any exchange collapses, massive tech bubbles bursting or forced selling – this is a slow gradual grind lower with very few buyers coming to the fore. One driver we suspect is leverage – the sector has taken on a lot of debt to buy Bitcoin with the expectation that under Trump; Bitcoin could only ever go one way! Now that Bitcoin has fallen, we are starting to see a significant amount of forced selling. The focus has now turned to MicroStrategy who may be forced to start selling Bitcoin to fund interest and debt repayments.

All this is happening in a time of global turmoil and high inflation - which are times when Bitcoin should be thriving. The old version (Gold) is definitely thriving and has recently traded as high as $5,500 per ounce, more than double where it was only 2 years ago.

Dislciamers:

*Bitcoin is highly volatile and not suitable for all investors. Before investing part of your KiwiSaver balance in the Koura Bitcoin fund, ensure you fully understand the risks associated with cryptocurrencies: https://shorturl.at/U6Mkp, and/or consider seeking financial advice.

*The views and opinions expressed in this article are those of Rupert Carlyon. This content is for informational purposes and should not be considered financial advice. Before making any financial decisions, consider consulting a financial adviser.

*Kōura Wealth Limited is the issuer and manager of the Kōura KiwiSaver Scheme. A copy of the Product Disclosure Statement is available at kourawealth.co.nz/documents