People in the UK are naturally pessimistic. We can’t help it, it’s just who we are.
This has been made no more obvious in recent days than by looking at recent fund flows data in the latest Calastone report, which showed investors have pulled some £10bn from equity funds in the past six months.
Yet the rest of the world seems rather more optimistic.
Indeed, during this time, all major markets are up, with the Japanese Nikkei 225 topping the charts with a 24.6% gain. Even those languishing at the bottom (the Euro Stoxx and FTSE All Share indices) have made double-digit gains.
So who is right – the international investors who keep buying (someone has to be for the market to keep rising) or the domestic investors selling down their equity funds?
There are pros and cons on both sides. For the bulls, equities have been a remarkably consistent place to put money over the past 15 years (even including the brief sell-off during the Covid pandemic).
Optimists will point to the transformative growth of artificial intelligence, which many believe is the next big technological advancement following the internet and mobile phones.
While some stocks are expensive, the huge cash spent by the largest technology companies to drive forward the pace of innovation means there could be huge earnings gains in the near future.
This should benefit the US market, which dominates global indices, but would also have knock-on benefits to companies across the world, as it makes them more efficient and boosts productivity.
For the bears, the valuations of the tech giants are high. These have propelled the US market to astronomical valuations. Based on price-to-earnings ratios, the S&P 500 currently sits at the 94th percentile versus its own history, meaning it has only been more expensive 6% of the time. The figures are worse on other metrics, such as price-to-book and price-to-sales.
Then, there are the concerns around circular financing, which is the phenomenon where AI stocks are promising each other future money without having the cash to hand currently.
The most blatant example is Nvidia, which has invested in AI-focused startups such as OpenAI, xAI, CoreWeave and Inflection in return for these companies promising to buy Nvidia’s GPUs. Other hyper-scalers, includign Amazon and Microsoft, are doing the same thing.
If the seeming house of cards falls, everything will suffer. As the adage states: ‘When the US sneezes, the rest of the world catches a cold’.
This suggests that, because the global market is so intertwined with the fortunes of American businesses, if they fail, international markets will also plummet – usually even harder than the US.
So which side is right? That is the question that investors always want the answers to.
Predicting the end of the run on US equities is foolhardy. People have forecast a fall in US stocks almost every year that I can remember, yet rarely have they been proven right.
This time around, even those wary of the current valuations accept that the bull run can go on for much longer than expected. But the concerns are valid too.
For those unsure, recycling the gains made from US tech giants to other markets seems prudent, while the truly concerned might want to start adding bonds and other safe havens to their portfolios.