The modern-day equivalent of the dot-com bubble is artificial intelligence (AI), with Nvidia’s meteoric rise on the Nasdaq echoing critics’ warnings from the Y2K era, says John O’Toole, head of multi-asset investment solutions at Amundi.
How high is too high? Speaking to The Edge Singapore in Paris, O’Toole’s comments came a week before Nvidia became the world’s most valuable company for the first time, after its market capitalisation soared to some US$3.34 trillion ($4.53 trillion) on June 18.
Just two days later, however, the chip designer’s shares slipped some 3% and the title was returned to Microsoft.
A “tiny number of stocks” are driving the S&P 500, but there are 495 stocks that might be a better representation of the real economy, says O’Toole on the sidelines of the two-day Amundi World Investment Forum on June 14. “When I say the real economy, I mean the economy ex this tech excess.”
In the face of the rise and rise of the Magnificent Seven, O’Toole wonders if “certain industries” should be treated differently by analysts and investors. The dot-com bubble, for example, burst a few years after some had predicted its demise, he adds. “Can you apply traditional valuation metrics? It’s unclear, of course, because it’s the future and nobody knows.”
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Investors who go “under the hood” of the S&P 500 will find a “massively distorted” picture, says O’Toole, who is based in Dublin, Ireland. The country’s headline GDP is skewed by numerous multinationals, drawn by low taxes, which incorporate their headquarters and book their revenue there.
As at June 22, Nvidia shares are up some 162% year-to-date (ytd). Its mega-cap peers are sporting similar characteristics this year: Meta Platforms is up 42%, Alphabet up 29% and Microsoft up 21%.
Other names buoyed by the AI story include Micron Technology, up 69% ytd; Taiwan Semiconductor Manufacturing Corp, up 63% ytd; and Advanced Micro Devices, which is down some 29% from an all-time high in March but still up 16% ytd.
See also: Europe has ‘no choice’ but to increase defence spending: former Finland PM Sanna Marin
Equally weighted, however, the S&P 500 “basically did nothing”, says O’Toole, having traded flat in 2023. The S&P 500 Equal Weight Index, for example, grew just 4.54% ytd. “You could argue if that’s a better way to look at things. It may or may not be.”
A ‘user-friendly’ UK
The same logic applies to the UK market via the FTSE 100 and the FTSE 250 indices. The index of the 100 largest UK companies by value “is not necessarily very representative of the domestic UK economy”, says O’Toole.
Instead, it better represents commodity and energy names, and O’Toole’s team sees it as a proxy play for commodity and risk assets compared to the broader, “more domestically-oriented” FTSE 250.
UK equities have been “unloved” due to post-Brexit dynamics, he adds, and Liz Truss’s 45-day government managed to create “a lot of volatility” in the domestic bond market.
That said, O’Toole believes “there is an opportunity to enter” in the longer term, and greater political stability may come as soon as the UK goes to the polls on July 4.
Armed with a fresh mandate, the new government “would be viewed as more user-friendly from a European perspective”, says O’Toole. “We do expect that the schism — this clean break between the UK and the European Union — may actually become a bit calmer. People realised that if you’re sitting right beside one of the world’s largest trading blocs and you take yourself out of it, there are implications.”
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The UK market is interesting precisely because of its sector composition, which is more exposed towards energy, says Monica Defend, head of the two-year-old Amundi Investment Institute.
Among the top 10 most valuable constituents of the FTSE 100 are energy and mining giants Shell, BP, Rio Tinto and Glencore. “It’s not a country call; it’s a sector call,” Defend tells The Edge Singapore, “just because of what is represented on the stock index.”
Two rate cuts this year
The European Central Bank announced on June 6 a quarter-point rate cut after nine months of maintaining rates, moving ahead of the US Federal Reserve for the first time.
“The central banks are increasingly focusing on their domestic objectives,” says Defend. The Fed’s updated economic projections, published on June 12 after a two-day policy meeting, showed it expected to lower borrowing costs only once this year instead of the three cuts pencilled in previously, according to their median estimate.
Defend expects the Fed’s first cut to come in September, down from the rate of 5.25%–5.5% that the policymakers have maintained since July 2023.
She believes the Fed will keep rates unchanged at its November meeting, owing to the US elections, before “possibly” delivering another cut in December.
Europe can’t afford protectionism
The European Commission announced earlier in June import tariffs of up to 38% on Chinese electric vehicles (EVs), after a nine-month investigation into China’s alleged “unfair” subsidies for its EV-makers.
The proposed provisional tariffs, which are set to apply by July 4, are “not punitive”, Germany’s Economy Minister Robert Habeck told Chinese officials in Beijing on June 22. “Common, equal standards for market access should be achieved.”
The EU’s investigation is set to continue until Nov 2, when definitive duties, typically for five years, could be imposed.
Being an export-oriented region, Europe “really cannot afford too much protectionism”, says Amundi’s Defend. “The outcome of the US elections will be key in determining the direction of trade policy. This will be relevant globally and, in Europe, for Germany and Spain in particular.”
The Amundi Investment Institute was launched in February 2022 to “enhance strategic dialogue with clients” and “cement Amundi’s leadership in economic and financial research”.
This concept is not new; BlackRock, the world’s largest investment manager, has its own institute, while the MSCI Sustainability Institute was introduced in September 2023 with a similar remit, albeit focused on ESG issues.
What distinguishes the Amundi Investment Institute is its proximity with the investment platforms, says Defend, as other such institutes develop views that may or may not be reflected in their portfolios.
Weaponry or defence?
Amundi’s investment conference at the Carrousel du Louvre was largely themed around geopolitical shifts and their impact on Europe, and featured speakers like former UK Prime Minister Gordon Brown and former Finland Prime Minister Sanna Marin.
In a separate Q&A session hosted for the media, Amundi’s chief investment officer Vincent Mortier was asked how the firm — Europe’s largest by assets — is responding to heightened tensions with its investment stance, particularly on weapons.
Conventional defence has always been part of Amundi’s investment universe, even in its ESG funds, says Mortier. “We refuse to have an exclusionary approach by sector, because we believe that each sector has a role to play. We try to find in each sector, the companies [that] are doing better, the best, compared to others; it’s a best-in-class approach [that is] sector-neutral.”
This stance meant Amundi’s funds did not underperform indices when the war in Ukraine broke out, he adds. “It’s not a political view to say that arms are good; it’s a realistic view… Defence is part of sovereignty and as a result, because it is for the good of the people, defence should be considered an ESG investment.”
Amundi’s global responsibility investment policy has set some exclusions on weapons, coal and oil and gas; the firm’s chief responsible investment officer Elodie Laugel clarifies this in a subsequent interview.
“Those exclusions are focused on activities that we strongly believe are harmful for the sustainability of the economic system, while an alternative at scale exists,” says Laugel. “If an alternative at scale doesn’t exist, just excluding, it doesn’t work; it’s not realistic. We should then play our active shareholder role and engage with companies.”
Photos: Amundi
