AI Fuels Equity Surge: Navigating February’s Market Dynamics

March 2024

February was a good month for equities, with markets up 4.7%, and already up over 6% year to date in local currency terms. A major theme in equity markets was AI which continued to underpin the performance of the companies investing in this area.

Continued economic resilience in the US meant that February was a month when markets had to rein in their expectations for interest rate cuts, which in turn led to small losses in bonds.

Investors who are willing to move cash away from banks and into Money Market Funds continue to benefit from higher interest rates.

Oil prices edged up slightly, but remain contained in the context of the disruption caused to deliveries due the ongoing conflicts in the Middle East. Meanwhile natural gas prices fell further.

Month and YTD Market Numbers

Nvidia 3^rd Company to Reach $2 Trillion Valuation

Another milestone was reached in the technology sector, as Nvidia became the third company to achieve a market capitalization of $2 trillion, joining Apple and Microsoft in the exclusive club. The chipmaker’s stock has soared more than 250% over the past year, driven by strong demand for its chips for use in artificial intelligence. Nvidia’s impressive growth has also boosted its earnings, which again beat analysts’ estimates.

As at 1 March 2024

AI Has Advanced Very Significantly in 15 months AI has seen significant advancements over the past 15 months. From the foundational GPT-3 (launched to the market in November 2022) to the introduction of Retrieval-Augmented Generation (RAG) to improve accuracy, and the shift towards customized generative AI models tailored for specific applications. Additionally, the expansion of AI into healthcare, education, and creative fields, coupled with innovations like SORA (which makes very realistic video from a paragraph of descriptive text), underscores the expanding breadth of AI’s impact and its evolving capabilities. This rapid progression highlights not only technological leaps but also a growing focus on the ethical use of AI and the need for oversight and regulation. The net position for me is that, I believe AI is a very exciting technology that will deliver significant productivity gains for people and organisations, who are willing to take the time to embrace it.

Keeping an Eye on Interest Rates and Inflation

During February, financial markets were aligning with the Federal Reserve’s expectations for U.S. interest rates amid persistent inflation, causing investors to adjust their predictions for the number of rate cuts in 2024 from six to three or four, and to postpone the anticipated start of rate cuts from March to June. The latest numbers for the Eurozone show inflation continuing to fall.

Europe’s Equity Markets Losing Out to US

Europe’s equity markets face difficulties, even though they are at record levels. They suffer from problems such as lower trading volumes, few new listings, and an increasing tendency for big companies to favour the US market. Flutter Entertainment (Paddy Power), CRH and Smurfit Kappa are some of latest companies to delist from home exchanges in favour of the US. It is suggested that the lack of vitality in Europe’s markets is due to a variety of reasons, including slow economic recovery after the 2008 financial crisis, scarcity of fast-growing tech firms, a more cautious investment culture than the US and less favourable rules and regulations for shareholders. Ultimately moving seems to result in higher valuations. Surely Europe must fight back if it hopes to reverse this trend?

Ukraine War – Two Years On

More than two years have elapsed since the onset of Russia’s invasion of Ukraine, a conflict that has deeply scarred the region. Despite Ukraine’s strategic counteroffensives reclaiming over half of the territories initially seized by Russia, the aggressor maintains control over 18 percent of Ukraine, solidifying its defences particularly in the eastern part of the country. Amid ongoing hostilities, Russia persistently bombards Ukrainian urban centres and blockades seaports, prompting Ukraine to intensify its drone assaults on Russian maritime assets and infrastructure. The humanitarian impact of the Ukraine war is profound and multifaceted, encompassing widespread loss of life, displacement of millions (both within and outside the country), and severe damage to infrastructure. Civilians are bearing the brunt of the conflict, facing dire conditions including food and water shortages,of the healthcare system, and a lack of access to basic services. Cyberattacks have compounded these challenges, targeting critical infrastructure and disrupting daily life.

Our Investment Outlook

Our outlook for 2024 remains cautious. This stance is influenced by several factors:

• Ongoing Geopolitical Risks: These risks are significant and potentially underappreciated by the markets.
• Impact of Higher Rates: There is a concern that higher interest rates could eventually have a detrimental effect on businesses and consumers.
• Mixed Economic Indicators: While indicators present a varied economic landscape, the overall projections suggest a flatlining or further slowdown in 2024.
• Inflation Dynamics: Despite recent improvements in inflation figures, there is always the risk of inflation proving more sticky.

Therefore, market volatility is likely to persist until there is greater clarity on: (a) the resolution or progression of geopolitical risks, (b) a consistent reduction in core inflation to the 2% target, and (c) the extent and duration of economic slowdowns.

Overall, these factors underscore the need for a measured approach to investment in the coming year.

For short-term investors, this remains a market to be avoided, but for our clients who are long-term investors, we continue to advise them to follow their plan and use market weakness to build on positions.

John Tuohy is Chief Executive of Acuvest, an Irish-owned, independent advisory firm specialising in wealth management, pensions, and investment advisory services for individuals, companies, pension schemes, charities, and institutions. John is a Chartered Financial Analyst (CFA) and a Fellow of the Chartered Association of Certified Accountants.