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A free personal assistant for everyone and a weight loss drug that actually works. These are, I think, the most important developments of the last 12 months. The importance of the first was brought home to me when I was talking to my mum. She works for her local MP and deals with all the issues and problems that people who write to their local MP have. A simple tool (like a Chat-GPT based AI) that can instantly write a formal letter to the council after a short brief is a real game changer for her. There isn’t much money in local politics so the fact that it is free (for now) is also, needless to say, very helpful.
Of course, at some point you will have to pay one way or another for the technology that US technology giants provide and US equities have been in a bull market for the last 15 months on the hope that most of these profits will accrue to them. There is, however, much more going on today than a simple AI/US equity story. The weight loss drug (Ozempic) is made by a European company (Novo Nordisk). European equities are now up 20% from their October lows. Novo Nordisk is part of the success story but so too are the European luxury goods business which continue to grow their revenues and margins at truly impressive rates. If you believe in the long-term Asian growth story then probably the best way to have profited from it over the last 10 years is to invest in European luxury. The success of companies like Novo Nordisk and Hermes means that the large cap European Euro Stoxx 50 index is in fact ahead of US equities year to date.
And you will see from the chart that the biggest gainer of all (in local currency terms at least) is Japanese equities. Even after allowing for the depreciation of the Yen, Japan has kept pace with the technology heavy US market in US dollar terms year to date. Part of the reason for this is that Japan also has some technology winners. A second factor is that Japan is finally escaping from the deflationary trap it fell into for the last 30 years (Japan finally ended its negative interest rate era this month). But also, it is notable to me that it looks like the global economic cycle is picking up, which has traditionally been helpful for export based economies like Japan. Air freight, in particular, is booming (albeit from a low base) and forward looking new order survey data is improving.
This helps export led markets like Japan but it should also help Europe too. The more cyclical parts of the European market have been left behind year-to-date. The UK mid-cap FTSE 250 index is up only 1.2% so far for example. The hope is that the upswing in global growth will help this year’s rally broaden as the more cyclical laggards catch up. We shall see, but even after a 20% rally Europe is still trading (just) cheaper than it’s longer term average (see below). At some point, the challenge for the US market will be seeing if the hope for the AI space actually starts to translate into increased profits for US companies. Diversifying away from some of this risk with some cheap, unloved European cyclicals makes sense to me today.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
