The AI trade finally cracked

The dam finally burst! Investors have been waiting for a crack in the AI trade, and at the end of the month Google and Amazon delivered it. Both kept growing their revenue, just more slowly than investors had hoped, while their spending on AI kept climbing. That knocked the air out of anything tied to AI, from the Nasdaq to the Korean chip makers.

The Nasdaq-100 fell 6.7% while the Dow rose 1.7% and US small companies edged up 0.5%. Korea’s share market fell 16.2%, the worst performer of any major market. Global shares overall fell a more modest 1.7% in US dollar terms, and bonds finally had a good month as investors went looking for somewhere safer to sit.

Here in New Zealand, the Reserve Bank surprised everyone by holding interest rates steady. Short-term interest rates fell and the local share market held up well, down just 0.3%, which helped protect Kiwi investors from the worst of the global sell-off.

From a Kōura perspective, outside our Bitcoin fund, our Emerging Markets fund was hit hardest, with the sell-off in Korea and Taiwan (these markets are all about chips) driving that fund south.

Before you start panicking, we need to remember a little short-term history here. We have been through this journey multiple times over the past few years. It is 50/50: markets might recover from here, or this could be the start of something worse. Long-term returns are generated by sticking with your strategy and staying invested, not trying to pick and time the market cycles!

Past performance is not an indicator of future performance.  Index returns are in local currency; Kōura returns are in NZD, pre-tax and after fees. 36-month returns are annualised. *Includes synthetic Strategic High Growth returns before its December 2024 launch. For more information on these numbers, scroll to the end of the blog.

Big Tech’s spending bill finally spooked investors

The Nasdaq hit a record on 6 October and then spent the rest of the month going backwards. The Nasdaq-100 finished October down 6.7%, while the broader S&P 500 slipped just 0.9%.

The damage came in the final week of results (from Amazon, Google and Intel). Revenues didn’t fall. They kept growing, just more slowly, while the bill for AI kept climbing.

The big US tech companies are expected to spend around US$800 billion on AI infrastructure this year, and a growing share of it is being funded with debt. Nobody is arguing AI isn’t real. The question investors started asking in October is when, and whether, all that spending pays its way.

Personally, I am a big believer in the AI story, and I am also astounded that we are disappointed when some of the largest companies in the world deliver “only” 12–25% revenue growth.

The flip side was a rotation into the parts of the market that were left behind in September. The Dow rose 1.7%, US small companies gained 0.5%, and European shares had a solid month, with Germany’s DAX up 2.8% and the broader European Stoxx 600 up 1.9%. Oil companies helped too: ExxonMobil’s quarterly profit roughly doubled on the back of higher oil prices.

Korea went from global outperformer to the world’s worst market

In August I described the Korean market as a leveraged bet on memory chips. October showed what that means on the way down. The KOSPI fell 16.2% for the month, and by mid-October Samsung Electronics was down almost 20% and SK Hynix down 28%.

The rest of Asia’s tech-heavy markets followed. Taiwan fell 5.7%, Japan’s Nikkei 5.2% and Hong Kong 5.4%. India was a rare bright spot, up 1.9%.

That made for a rough month in emerging markets, which fell 7.9%. Our Emerging Markets fund fell 7.7%, a painful month, but it is still up 16.8% over the last 12 months. This is the trade-off with owning the companies that build the world’s AI hardware: the long-run growth is real, but so is the volatility.

Bonds finally had a good month, and the Fed sat on its hands

Last month we wrote about the return of the bond vigilantes. In October they took a break. The US 10-year Treasury yield peaked around 5.36% mid-month, then fell to 4.93% by 30 October, down more than a third of a percentage point over the month. That was the biggest monthly rally in US bonds since 2024.

The fall in global interest rates was caused by the US Fed holding interest rates and fears that the AI bubble bursting may cause economic damage.

Markets now put the odds of a December rate rise at more than 80%. So while bonds enjoyed October, I would not read it as the start of a new trend.

Oil kept climbing

Brent crude rose roughly 11% in October to finish around US$113 a barrel, after touching a four-year high of US$116.72 on 23 October. Tension between the US and Iran, and the risk to tankers moving through the Strait of Hormuz, kept a large risk premium in the price.

There were moments of relief. Talk of renewed US–Iran peace efforts and a European plan to release 42 million barrels from reserves pulled prices back late in the month. But reports that the US was weighing fresh strikes on Iran pushed Brent straight back up on the last trading day.

Oil is the main reason central banks are so nervous. It feeds directly into petrol prices, which are pushing up inflation around the world, including here in New Zealand.

Here in New Zealand, the Reserve Bank surprised everyone by doing nothing

A third straight rate rise was almost fully priced in. Instead, on 28 October the Reserve Bank held the OCR at 2.75%, on a knife-edge 4–3 vote, ten days out from the 7 November election.

Economic data in New Zealand is proving stronger than anticipated, with New Zealand moving into growth and job creation starting. Though inflation remains high and a falling exchange rate is only going to push it higher. Further rate hikes are seen as a certainty with a December rate rise being fully priced in by the markets.

The New Zealand dollar ended the month around 56.3 US cents, little changed, but it slid to a new low of about 80 Australian cents after the decision.

The NZX 50 slipped 0.3% for the month, with energy, building and aged care stocks among the weaker performers.

Bitcoin gave back September’s gains, then Binance was hacked

Bitcoin fell 7.4% in October to finish at about US$77,000, after trading as high as US$86,900 earlier in the month.

Late on 29 October came the biggest theft in crypto’s history. Hackers drained around US$6.3 billion from Binance, the world’s largest crypto exchange, in a little under four hours. That is around four times the previous record, the US$1.5 billion Bybit hack in February 2025.

The Binance response was quick. They confirmed that they will cover all losses and immediately started working with issuers and different blockchains to freeze assets and attempt to recover the lost funds. The hack has been linked back to North Korea.

In the new world of AI, cyber hacks are getting harder and harder to stop – we should expect more of these attacks. Does this mean anything for our Bitcoin fund? No. We have chosen to invest in funds managed by Fidelity and BlackRock – they are covered by insurance and are large global businesses that we would expect (but cannot be certain) will cover losses if anything goes wrong.

Bitcoin fell about 5.5% on 30 October to around US$76,000 after news of the attack spread, while Coinbase shares dropped 14%. Bitcoin itself wasn’t hacked.