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  • Tech Surge Despite Fluctuations

    • 20th May 2023
    • Posted by: Celticfp
    • Category: Investment Committee
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    In the past week, the financial landscape has continued to fluctuate, yet overall, the stock markets have trended upward. Japan's equity market, in particular, has seen a strong performance with consistent growth. This progression has occurred even in light of less than stellar economic data and currency depreciation. Notably, American stock markets have seen impressive growth, driven largely by significant tech companies. Q1 earnings reports have exceeded expectations, marking a return to projected earnings growth for developed world stocks after a half-year decline. In Europe, cyclical sectors have come out on top while real estate has lagged. The year's latter half has seen an approximate 8% growth rate, although the outlook for 2023 as a whole remains modest at a mere 1% compared to 2022. Rising interest rates continue to impact companies, raising concerns about the European Central Bank's future monetary tightening. In the US, retailers have noted a sustained decrease in expenditure on luxury and other discretionary items. Nonetheless, the pent-up demand for services is still being released, especially for sectors such as travel and entertainment. Interestingly, revenue expectations have been exceeded in both regions. In Europe, although margins remain tight, sales have markedly improved. US corporations have also seen an upturn in both sales and margins, reflecting a more stable economic environment. These observations align with improved global service sector purchasing manager indices (PMIs) and the ongoing discussions around banking stress, shareholder cash return, and artificial intelligence during earnings calls. Artificial Intelligence (AI), particularly its use and development in chatbot applications, remains a hot topic in business circles. The industry seems divided in its approach to AI, with service companies seeing it as a threat while others view it as an opportunity for cost-cutting. Yet, only a select few stand to benefit directly from AI โ€“ namely, hardware manufacturers at the forefront of fast computing and software tech companies with significant capital to invest in research and development. Understandably, the top performers have been hardware giants like NVIDIA and behemoths like Microsoft, Amazon, and Alphabet. The NASDAQ 100, which includes many of these winners, has shown an improvement in both earnings forecasts and price-to-earnings multiples. This tech surge, reminiscent of the dotcom bubble's onset, is happening amidst a backdrop of not-so-low and even increasing yields, indicating an element of defensive investing. The US dollar's recent strengthening and the tightening liquidity signalled by the rush for offshore dollars are further indications of a cautious investor sentiment. While the promising earnings results, particularly in the US and Europe, bring a measure of optimism, the enduring financial constraints for many companies and the AI-centric narrowing of profitability breadth temper this outlook. Central banks taking a less hawkish stance would indeed bring a greater sense of optimism

    In the past week, the financial landscape has continued to fluctuate, yet overall, the stock markets have trended upward. Japan’s equity market, in particular, has seen a strong performance

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