At a glance
- The US market had a strong quarter, while the UK market struggled
- Companies taking advantage of AI have seen strong returns over the past few months
- With so much short-term uncertainty, ensure you are well diversified and invest for the long-term
Our fascination with Artificial Intelligence, or AI, goes back well over 100 years at this point. From 2001: A Space Odyssey to The Matrix, questioning the role AI could have on humanity has long been one of Hollywood’s favourite topics.
Up until recently, AI generally remained the realm of science fiction for most people. The past year, however, saw monumental advancements on this front. The likes of ChatGPT and AI chatbots have revolutionised how businesses think and have everyone asking themselves (or an AI) what it means for them.
From an investment point of view, this helped bring an end to 2022’s year of pain for tech stocks. Companies well placed to take advantage of AI have seen strong returns over the past few months. For example, chipmaker Nvidia saw its market capitalisation break $1 trillion for the first time, while Apple, at one point, reached a value of over $3 trillion.
The performance of these technology giants helped drive the NASDAQ up 6% last quarter. Overall, the Index’s growth for the first half of the year reached a four-decade high of over 30%.
US markets were generally helped more broadly by inflation continuing to fall over the quarter. Inflation measured by CPI fell to 4% in May (the most recent figures at the time of writing), which allowed the Federal Reserve (Fed) to pause the interest rate increases it had been implementing since 2022. It should be noted this pause is likely temporary, and the Fed has made clear that more increases are probably on the way. On the back of relatively positive economic figures, the S&P 500 grew over the quarter, while US Government bond yields also finished the quarter on a high note.
While all this is undoubtedly good news for investors, the rise of these extremely valuable tech companies also has the potential to distort an investment portfolio.
At the end of May, the top 10 constituents of the MSCI All Country World Index (ACWI) made up 17.7% of its total. And those top 10 companies were almost exclusively US tech companies. Apple alone has a higher market cap than the FTSE 100.
A passive fund tracking the above index will likely now have a large amount invested in a few companies from a relatively similar background. We saw in 2022 that technology shares do not always go up. If the sector goes through another downturn, you’ll want to be diversified to try and limit the losses.
While the US market has had a strong quarter, at the other end of the spectrum is the UK market. In contrast to its US compatriots, the FTSE struggled last quarter, as UK inflation figures remained stubbornly high, and the Bank of England continued to raise interest rates.
While UK shares have struggled a bit in recent months, this doesn’t mean you should be avoiding UK shares to buy more expensive markets. We’re confident the UK currently offers a lot of value for active fund managers looking for value investments. Many FTSE 100 companies are paying the price for low British economic forecasts, even though the majority of their business is abroad. These companies could be a good opportunity for long-term investors.
Japan provides a great example of opportunities available. While the market isn’t without its challenges, it is home to a number of exciting companies and pro-business policies. It can act as a great geographical diversifier for the right investor. Over the last quarter, the Nikkei 225 grew an impressive 18.4% – faster than any of the major American or European Indexes.
It was also a positive quarter for fixed income. After a difficult 2022, many bond yields are now trading at some of the highest levels in years, as fears of a deep recession gradually recede across much of the developed world and inflation gradually comes down.
All of which leaves the investing world in an interesting place. Most markets performed well over the quarter; however, this wasn’t an even recovery, and for equities much of the gains came from a small number of larger companies. Although inflation has gradually fallen, it remains elevated, and there will likely be further increases to inflation in the second half of the year. With so much short-term uncertainty, it remains as important as ever to ensure you are well diversified, and investing with a long-term lens.
Past performance is not indicative of future performance. The value of an investment with St. James’sPlace will be directly linked to the performance of the funds you select, and the value can therefore go down as well as up. You may get back less than you invested.
SJP Approved 11/07/2023