Posts tagged: Semanal

Monday 3rd of February 2025

For the past 40 years, one of the biggest trends in finance has been the rise of “winner-take-all” companies in the technology sector. These are businesses that dominate their industries, making it extremely difficult for competitors to catch up. Think of Microsoft in PC software, Google (Alphabet) in internet search, Amazon in online shopping, Facebook (Meta) in social media, and Apple in high-end consumer gadgets. These companies have benefited from what’s called “network effects”, the idea that the more people use a service, the more valuable it becomes. Because of this, most of the profits in these industries have gone to just one or two major players.

For investors, the key to making money over the past few decades has been betting on these tech giants early. Given this history, many people assumed that artificial intelligence (AI), the next big technology revolution, would follow the same pattern, with one or two companies taking all the winnings.

However, something happened recently that shook up this assumption. It wasn’t a market crash, nor a sudden panic, it was simply the realisation that AI might not be a “winner-take-all” game after all.

The best way to explain this is by comparing AI to past technological revolutions like the invention of cars and airplanes. While these innovations created big, successful companies (like Ford and Boeing), they also led to lots of competition. This meant that while some companies did well, the real winners were consumers, who got access to better products at lower prices.

A Chinese AI company called DeepSeek recently launched an AI model named R1. What makes R1 interesting is that it performs at the same level as models from top companies like OpenAI (the creators of ChatGPT), Anthropic, and Meta, but it was built at a much lower cost. Even more surprising, DeepSeek used older, less powerful computer chips rather than the cutting-edge chips many experts thought were necessary for advanced AI.

Until now, Nvidia has been the go-to company for AI chips, and its most advanced processors have been seen as essential for training top AI models. But DeepSeek showed that good AI models can be built using older, less expensive chips. This opens the door for other companies to enter the AI race without relying on Nvidia’s best technology.

The dominant belief has been that training AI requires massive amounts of data and computing power, which only big companies like Microsoft, Google, and Amazon can afford. DeepSeek’s success suggests that smaller companies might be able to compete with much lower costs.

And up until now, if a company wanted to use AI in their products, they usually had to rely on the big AI providers. But with models like R1, businesses may soon be able to run AI on their own servers, reducing their dependence on tech giants like OpenAI and Google.

These shifts could have big consequences for both technology companies and investors.

For one, Nvidia, the company that makes the best AI chips, saw its stock price fall nearly 17% in a single day. The reason? Investors are starting to believe that Nvidia’s dominance in AI may not be as secure as once thought.

But it wasn’t just Nvidia that was affected. Companies that provide infrastructure for AI data centres (the huge computing hubs that power AI models) also took a hit. This includes utility companies like Constellation, Vistra, and NRG, as well as suppliers like GE Vernova, Eaton, and Quanta Services, which build power systems for data centres.

Interestingly, the biggest tech companies: Amazon, Google, Microsoft, Meta, and Apple, weren’t hit as hard. While they have invested heavily in AI data centres, they may now be able to spend less on infrastructure if AI models become more efficient. In fact, companies like Apple and Microsoft, which specialise in software and applications rather than AI infrastructure, might even benefit from this shift.

It’s too soon to say that big tech companies are losing control of AI. Nvidia, for example, still has a major advantage because its software ecosystem (called CUDA) is the industry standard. And while DeepSeek’s AI model is more efficient, it could still benefit from Nvidia’s high-powered chips.

Even after its steep drop, Nvidia’s stock is still trading at levels that were considered extremely high just a few months ago.

More broadly, while the market’s reaction to R1 was significant, it wasn’t a disaster. The Nasdaq stock index fell about 3% in a day, a bad day, but not a full-blown panic. The idea that AI will be a “winner-take-all” market has been shaken, but not completely disproven.

What does all of this mean for everyday investors and technology watchers? The key lesson is that AI’s future might not be dominated by a single company or a small group of tech giants. Instead, we may see more competition, lower costs, and broader access to AI technology, much like what happened with cars and airplanes in the past.

For consumers and businesses, this is great news. More competition means faster innovation, better AI tools, and lower prices. For investors, however, it’s a reminder that even the biggest trends in technology don’t always play out the way everyone expects.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Tuesday 22nd of January 2025

If you’ve been paying attention to financial news, you might have heard about the “Magnificent Seven” tech stocks. These are seven of the largest technology companies in the US stock market, and they’re so big that their performance can influence the entire market. Recently, these stocks haven’t been doing as well as they used to, and that’s caused some ripple effects.

The Magnificent Seven include companies like Apple, Microsoft, and Google’s parent company, Alphabet. These are the giants that make the gadgets you use, the software you rely on, and the platforms where you spend hours scrolling.

In the stock market, these companies are so massive that when their stock prices go up or down, they pull the rest of the market along with them. For example, if Apple has a bad month, it can make the entire stock market look less attractive to investors.

Recently, the Magnificent Seven haven’t been doing great. While they had a good day here and there, their overall performance has been underwhelming since Christmas. This is unusual because these companies usually perform well, no matter what’s happening in the economy.

A key reason for this change could be interest rates. Interest rates affect how much it costs for companies to borrow money and for consumers to take out loans. Higher rates often slow down the economy, which can make investors nervous. When rates go up, it’s like raising the price of a ticket to ride the “investing train”, fewer people are willing to jump on board.

Oddly enough, in this case, higher interest rates seem to have helped Big Tech, while lower rates have hurt them. That’s the opposite of what usually happens. Why? Because higher rates may signal that the economy is slowing down. In tough times, investors look for companies that can keep making money even if the economy struggles. The Magnificent Seven fit that description because they’re not as dependent on economic growth as other industries.

While the Magnificent Seven have stumbled, other industries have been shining. Energy companies, industrial firms, and banks have been doing better. These industries thrive when the economy is growing or when there’s a belief that growth will pick up.

For example, if you’ve noticed more construction or increased factory activity, that’s good news for companies that make building materials, heavy machinery, or manage energy resources. Investors see these trends as a sign that the economy might be picking up, especially with the new US administration promising tax cuts and fewer regulations.

Another big piece of news is that the US government is threatening to place heavy tariffs (taxes on imports) on goods from Canada and Mexico. These are America’s closest trading partners, so you’d think this would cause chaos in the markets. Surprisingly, the stock market hasn’t reacted much, but there are still important things to consider.

Tariffs are like a toll you pay when bringing goods into a country. For example, if a US company wants to buy lumber from Canada or cars from Mexico, they’d have to pay an extra 25% because of these tariffs. That makes these goods more expensive, which could lead to higher prices for consumers.

For the US, the pain would be less severe but still noticeable. Some industries that depend on imports, like carmakers, construction companies, and grocery chains, would need to adjust. It might take time to find new suppliers or produce these goods domestically.

The situation with the Magnificent Seven and tariffs is still developing. Even small changes in the stock market or trade policies can have a ripple effect that touches everyone’s lives, whether you’re an investor or just trying to stick to a budget.

Remember, understanding the basics can help you make informed decisions, whether it’s about your spending, your career, or your long-term financial goals.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 13th of January 2025

Many people worry about the possibility of a stock market bubble. A bubble happens when the price of something, like stocks, houses, or even tulips, gets so high that it doesn’t make sense anymore. Eventually, prices crash, leaving investors with huge losses. If you’ve heard stories about big financial crises, like the dot-com bust in the late 1990s, you know how damaging bubbles can be.

A bubble isn’t just about prices being high; it’s about irrational thinking. Imagine you hear about a group of stocks everyone is excited about. People believe these companies are so amazing that they’re willing to pay any price to own a piece of them. They fear missing out, and the frenzy pushes prices higher and higher. This emotional behaviour, not grounded in facts, is what creates a bubble.

One key sign of a bubble is when people say things like, “This time is different,” meaning they believe the rules of investing no longer apply. This phrase has popped up in every bubble in history, from the Dutch tulip mania in the 1600s to the internet stock craze of the 1990s.

Today, a small group of companies, nicknamed the “Magnificent 7,” has dominated the US stock market. These are big technology companies, like those working on artificial intelligence (AI). They’ve been responsible for most of the stock market’s gains in recent years.

Some people wonder if these companies’ stock prices are in a bubble. To understand, let’s look at how bubbles form and what signs to watch for.

Bubbles often involve something new and exciting, something people don’t fully understand.

When tulips were introduced to Holland, they were considered exotic and beautiful. People paid outrageous prices for them, believing they were priceless. Eventually, the bubble burst, and tulip prices crashed.

The internet was revolutionary, and investors believed it would change the world (which it did). But during the dot-com boom, people invested in internet companies without understanding whether these businesses would succeed. Many internet companies eventually failed, and their stocks became worthless.

New innovations create excitement, but they also make it hard to know what a fair price should be. If something has never existed before, how do you decide what it’s worth? This uncertainty can lead to overly optimistic pricing.

To understand if stock prices are too high, let’s start with the basics. When you buy a stock, you’re buying a tiny piece of a company. In return, you’re entitled to a share of that company’s profits, now and in the future.

Stock prices are often measured using something called the price-to-earnings (P/E) ratio. This tells you how much you’re paying for each dollar of the company’s profit. For example, if a company has a P/E ratio of 20, you’re paying $20 for every $1 of its earnings.

If the P/E ratio is much higher than usual, it might mean investors expect the company to grow rapidly. But if the price is too high, it can lead to disappointment if the company doesn’t grow as expected.

During bubbles, investors often assume new companies will keep growing forever. They don’t consider the risks, like competition or new technologies that could disrupt the market.

For instance, in the 1990s, investors believed e-commerce (online shopping) would change the world. It did, but most internet companies from that time failed. Only a few, like Amazon, survived and thrived.

Today’s leading technology companies have incredible advantages, like cutting-edge technology and global scale. But history shows that even the biggest companies can face challenges. In the fast-moving tech world, being disrupted by newer technologies is always a risk.

The US stock market has done incredibly well recently. In 2023, the S&P 500 (an index of the 500 biggest companies) went up by 24.2%, and in 2024, it rose another 23.3%. That’s unusual, such big gains two years in a row are rare.

Now, people are asking: What’s next? Are stock prices too high?

The current P/E ratio for the S&P 500 is 23.6. This is higher than average, but not ridiculously high. It suggests that stocks are expensive, but not in full-blown bubble territory.
During past bubbles, people said things like, “There’s no price too high for these stocks.” That level of enthusiasm isn’t as widespread today, which means we’re not in a bubble. Valuations are high, which means investors should be discerning about where to allocate capital, but we are some way off being in bubble territory.s

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 2nd of December 2024

If you’ve been hearing the phrase “TINA” in financial conversations in recent years, it might sound like an old friend is back in town. But in investing, TINA isn’t a person, it’s a concept: ‘There Is No Alternative’. A decade ago, this phrase meant that with low inflation and rock-bottom interest rates, investors had no choice but to put their money into stocks, especially since bonds offered little return.

Now, TINA has returned with a new twist. Instead of referring to stocks broadly, it reflects a growing belief that when it comes to investments, there’s no alternative other than US assets, especially US stocks. But is this really the case? And what does it mean for retail investors?

The US stock market has long been a favourite for investors, and for good reason. It’s home to the world’s largest and most successful companies, think Apple, Microsoft, Amazon, et al. These companies operate globally, dominate their industries, and consistently generate profits.

But there’s more to the story. Even as uncertainty clouds the future, be it political shifts, potential inflation, or global economic challenges, US stocks have shown remarkable resilience. Investors around the world see the US as a “safe haven” for their money.

The US has the deepest and most reliable financial markets in the world. When investors need to move large sums of money quickly, US stocks and bonds make it easy without causing major disruptions. The US dollar remains the global reserve currency, meaning it’s trusted and used worldwide. Even when economic uncertainty arises, the dollar (and by extension, US assets) remains a reliable place to park money.

US companies consistently lead in innovation, whether it’s in technology, healthcare, or finance. This growth potential attracts investors, especially when other parts of the world face stagnation. Even with concerns about the political climate, like the second Donald Trump presidency, investors are still heavily favouring US stocks.

Regardless of political opinions, markets often see policies like tax cuts or deregulation as good for business, at least in the short term. While there’s some nervousness about the potential for political interference in institutions like the Federal Reserve, the US financial system remains one of the most trusted in the world.

Despite worries about how future policies might impact the economy, other countries’ markets, like Europe or China, have their own challenges, making US stocks look even more attractive by comparison.

Of course, it’s not all sunshine and rainbows. Every investment comes with risks, and the US market is no exception. Policies that increase spending or cut taxes could lead to higher inflation or ballooning government debt. If investors lose confidence in US government bonds, it could ripple through the entire economy. Tariffs and trade wars can hurt global growth, and while they may benefit some US companies, they can harm others.

Despite these risks, the US stock market’s track record and ability to weather storms make it a core part of investment portfolios.

While US stocks are an essential part of any portfolio, they shouldn’t be your only investment. While growth is slower there, European markets offer stability and opportunities in sectors like luxury goods and green energy. Despite recent challenges, countries like China and India have long-term growth potential due to their large and growing populations. Holding assets in different currencies can reduce the risk of being overly exposed to fluctuations in the US dollar too.

Economies don’t all move in sync either. When the US market slows down, other regions might be growing, balancing out your portfolio.

If you’re a retail investor, US equities should form the foundation of your investment portfolio. Start with broad-market index funds or ETFs (Exchange-Traded Funds) like the S&P 500, or active portfolios with significant US exposure. These give you exposure to a wide range of US companies with lower fees.

US equities are not just another investment option, they are a cornerstone for investors around the world. Their stability, growth potential, and global appeal make them essential in any portfolio. However, while TINA may point to US stocks as the dominant choice, remember that diversification is key to long-term success too!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 4th of November 2024

We’re now a couple of weeks into earnings season for the third quarter of 2024 and we have enough information to start thinking about what these latest data tell us about the state of the economy and market outlook.

First, the bad news, although it’s not really new news. The Chinese consumer remains in poor shape. Any consumer focussed company we follow, from high end luxury down to consumer basics, who has major exposure to the Chinese market is reporting business performance there which is below expectations. China macro weakness is not a new story, but many had been hoping for the worst to be behind us and a possible inflection to come soon. It looks like investors will have to be more patient, the Chinese economy and consumer remain weak based on the data we’ve seen from corporate results so far.

The good news for investors is that China consumer weakness is the only negative story we’ve seen so far this earnings season, in terms of read across for the economy. At time of writing, two of the big three cloud hyperscalers (Microsoft and Alphabet) have reported results and both reported numbers ahead of expectations with strong rates of growth in cloud computing.

The wave of cloud computing and migration of existing IT stacks to the cloud continues to be a source of sustained growth, a major theme in the global economy with a long road of growth ahead. What’s more, generative artificial intelligence (AI) is a major contributor to the ongoing success of these cloud businesses, driving further growth in revenues and profits. AI is not a ‘maybe’ story, it’s a real technology cycle driving real-world businesses today.

In online advertising we’ve seen good results from Meta (owner of WhatsApp, Instagram and Facebook) and Alphabet (owner of Google and YouTube). The primary driver of these businesses is online advertising spending, and both companies reported results above expectations for the third quarter of 2024. In both cases, the application of AI is further supporting business success, as AI is improving the return on investment for businesses using these platforms to advertise their products. These two companies look set to dominate the future of online advertising.

En Europa, hay evidencias de que el consumidor está en una mejor situación de lo que muchos temían. Los sólidos resultados de Garmin y Booking fueron impulsados por la fortaleza en Europa. Los productos vestibles de Garmin son populares entre los entusiastas de los deportes al aire libre y aquellos que practican hobbies relacionados con actividades al aire libre, y esta división reportó resultados muy por encima de las expectativas, impulsados por el gasto de los consumidores en Europa. El negocio de Booking, centrado en viajes, tiene una fuerte presencia en Europa, y también reportaron cifras sólidas para el trimestre.

The important take away so far is that in the major global themes in which we invest, we continue to see strength driven by new technology adoption, exceptional corporate performance, and continued cultural trends towards greater spending on travel and experiential services. These trends are not going away and continue to power growth in revenues and profits of the companies we invest in.

There are still many companies globally who are yet to report their results, so we will wait until we have more information before making an updated call on the state of the economy and outlook in the short-term, but at this stage, it’s a case of so far so good!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Tuesday 22nd of October 2024

When inflation started to surge globally in 2021, many economists and policymakers debated whether it was “transitory” or likely to be a prolonged issue.

The word “transitory” was commonly used to describe price pressures that would resolve themselves once the supply shocks and economic imbalances from the pandemic eased. But as inflation persisted longer than anticipated, many were quick to dismiss the transitory narrative, likening the situation to the sustained inflation of the 1970s.

In hindsight, however, there is a growing argument that inflation over the past few years bears more resemblance to the inflationary period following World War II in the late 1940s than the infamous stagflationary spiral of the 1970s. This shift in perspective suggests that policymakers may have been overly concerned with avoiding the mistakes of the 1970s, when in fact this inflationary episode had much more in common with the post-war period.

The inflation of the 1970s was driven by a combination of factors, including demand-pull inflation, cost-push pressures from oil price shocks, and wage-price spirals. It was a period of stagflation; high inflation coupled with slow economic growth and high unemployment. In response, central banks, particularly the Federal Reserve under Paul Volcker, took aggressive measures, pushing interest rates sky-high to rein in inflation. Volcker’s draconian monetary tightening is often credited with ending the inflationary spiral, though it also led to a severe recession in the early 1980s. Policymakers ever since have taken this episode as a cautionary tale, believing that sustained inflation can only be tamed through aggressive tightening, and that failure to act early can result in entrenched inflation expectations.

This 1970s legacy loomed large in 2021 when inflation began to rise. There was an overwhelming fear among policymakers and market participants that allowing inflation to run even slightly hot could result in a similar spiral, where inflation expectations become unanchored, leading to wage demands and price-setting behaviour that could entrench inflation for years. This is one reason why central banks, led by the US Federal Reserve, raised interest rates at a historically aggressive pace from 2022 onwards.

However, a growing body of evidence now suggests that this bout of inflation may have more in common with the late 1940s, when inflation also surged as a result of a massive, temporary dislocation of the global economy due to World War II. In that period, inflation spiked due to a combination of pent-up demand, supply shortages, and the unwinding of price controls. Inflation in 1946 and 1947 was intense, with prices rising at double-digit rates, much like they did in 2021 and 2022. However, the inflationary pressures were largely transitory, resolving themselves as the economy adjusted to peacetime production, supply chains normalised, and the temporary mismatch between demand and supply abated.

In both cases, the late 1940s and the early 2020s, the inflation was primarily driven by supply-side disruptions rather than excessive demand. In the 2020s, the COVID-19 pandemic caused widespread supply chain disruptions, labour shortages, and shifts in consumer demand patterns.

One of the key factors that distinguishes the inflation of the 2020s from that of the 1970s is the supply-side nature of the price pressures. The 2020s inflation was largely driven by supply chain disruptions, semiconductor shortages, labour market tightness, and energy price volatility exacerbated by Russia’s invasion of Ukraine. These are predominantly supply-side issues, and once resolved, the inflationary pressures would naturally subside. In contrast, the inflation of the 1970s was more demand-driven, with oil price shocks compounding pre-existing inflationary pressures from over-expansionary fiscal and monetary policies.

By late 2023, many of the factors that had driven inflation higher were showing signs of easing. Global supply chains had begun to normalise, energy prices had come down from their post-Ukraine invasion peaks, and labour markets were starting to cool. Even where inflation remained somewhat sticky, such as in the services sector, it was increasingly clear that the worst of the inflationary pressures had passed. This easing of supply-side constraints mirrors the pattern seen in the 1940s, when inflation cooled once the supply-demand imbalances caused by the war were resolved.

In hindsight, the inflationary pressures of the early 2020s appear to have been driven largely by temporary, supply-side disruptions, much like the inflation experienced in the aftermath of World War II. While inflation persisted longer than many had initially anticipated, it has increasingly shown signs of cooling as supply chain issues have been resolved and global economic imbalances have normalised. Policymakers’ bias toward avoiding a repeat of the 1970s may have led to overly aggressive tightening. As inflation continues to moderate, this period may ultimately be remembered as a bout of transitory inflation driven by unique, temporary factors, rather than the beginning of a new era of sustained inflationary pressure. And that is good for the outlook for risk assets!

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 14th of October 2024

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Why UK Equities Could Offer Long-Term Upside?

In recent years, UK equity markets have struggled to keep pace with global competitors. With sluggish economic growth and persistent underperformance in UK stocks, it’s easy for investors to overlook the potential long-term opportunities the UK economy may offer. However, beneath the surface of these short-term challenges, there is a growing case for optimism. The UK, while lagging in certain areas, has a wealth of untapped potential, particularly in sectors like infrastructure, housing, and capital investments, which could drive significant economic growth in the future.

It’s no secret that UK equities have been trading at a discount compared to their international peers. Factors such as political uncertainty following Brexit, lacklustre economic growth, and sluggish productivity have all contributed to this. Moreover, markets have been hesitant to price in any optimism for the UK’s economic outlook, which has further driven down the value of UK equities relative to other developed markets.

For example, the FTSE 100, a benchmark index of the largest publicly listed companies in the UK, has lagged other major indices like the S&P 500 in the US or the Euro Stoxx 50 in Europe. This underperformance is partly because the UK economy has grown at a slower pace, and investors have seen more attractive opportunities elsewhere. As a result, many UK stocks are priced more cheaply than their global counterparts.

But while this current landscape may seem discouraging, it is also where the opportunity lies. Markets are often forward-looking, and today’s depressed prices in UK equities reflect the challenges the economy has faced. However, for long-term investors, this presents an entry point into an economy that may be on the cusp of a transformation.

One of the main reasons the UK has underperformed economically over the past few decades is a chronic lack of investment in key areas like infrastructure, capital assets, and housing. These are the building blocks of any thriving economy, and the UK has been lagging for a long time. Addressing these shortcomings could be the key to unlocking the country’s economic potential.

The UK’s infrastructure, from transport networks to broadband, has long been in need of significant upgrades. Roads, railways, and other essential services are often outdated, leading to inefficiencies that hamper economic growth. The underinvestment in infrastructure is not just a recent problem but has accumulated over decades, limiting productivity and the country’s competitiveness on the global stage.

This lack of investment, however, offers an opportunity. As governments around the world look to infrastructure spending to stimulate economies post-pandemic, the UK has the potential to follow suit. A renewed focus on upgrading the country’s infrastructure could not only boost short-term growth but also lay the foundation for sustained long-term productivity gains. Investors should keep an eye on companies involved in construction, transport, and related sectors, as they could benefit from a surge in government spending.

Another area where the UK has fallen behind is in the investment in capital assets, such as machinery, technology, and automation. For years, UK companies have been hesitant to invest in new capital, preferring to cut costs rather than increase spending. This has led to stagnant productivity growth and has made UK businesses less competitive on a global scale.

However, this may be changing. As technological advancements accelerate, companies are starting to recognize the importance of investing in capital to stay competitive. Automation, artificial intelligence, and green energy technologies are just a few areas where increased investment could lead to significant gains in productivity. This could, in turn, boost the profitability of UK companies and the broader economy, making UK equities more attractive over the long term.

One of the most pressing issues facing the UK economy is the chronic shortage of housing. For decades, the UK has failed to build enough homes to meet demand, leading to skyrocketing house prices and affordability issues, particularly for young people. The country’s restrictive planning laws and green belt policies have been major contributors to this problem. While intended to protect the countryside, these regulations have often made it difficult to build new homes, especially in areas where they are needed most.

However, there are signs that this could change. A growing awareness of the housing crisis, combined with pressure from younger generations, is leading to calls for reform. If the new Labour government can tackle the labyrinthine planning process and rethink outdated green belt policies, it could unlock a wave of new housing developments. This would not only help address the affordability issue but also boost the construction industry and the wider economy.

For investors willing to take a long-term view, the current discount on UK stocks may offer an attractive entry point into an economy poised for transformation. The key is patience! Those who recognise the latent potential of the UK economy and its equities today may be rewarded in the future as the country begins to realise its full potential.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Tuesday 8th of October 2024

Lessons from the 1990s

The stock market is often complicated and unpredictable, but sometimes, the conditions align in such a way that stock prices rise rapidly in what is known as a “melt-up.”

This is when investors start pouring money into the market, driving prices higher in a relatively short period of time, often fuelled by a combination of optimism, new technologies, and economic policies.

Today, there are signals suggesting that we might be on the verge of another melt-up, similar to one that happened in the 1990s.

To understand how a melt-up works, the 1990s in the United States provides a perfect case study. Several factors came together in that decade to push the stock market into a rapid rise. Let’s break down those factors and why they created an environment for a melt-up.

One of the key drivers of the stock market’s rise in the 1990s was innovation in technology. The internet was starting to revolutionise industries. Companies like Microsoft, Intel, and Cisco Systems were at the forefront of this new technological wave, developing products and services that were reshaping how businesses operated and how people communicated.

Investors saw the potential for these companies to grow, and their stock prices soared. It wasn’t just the big names, either. Startups and smaller companies that were part of the tech boom also experienced sharp increases in their stock prices, as everyone wanted a piece of what was believed to be the future of the economy.

The 1990s were also marked by a strong US economy. The country was experiencing a period of sustained growth, with low unemployment and rising wages. This created an environment of confidence, as consumers and businesses were spending more, leading to higher corporate profits.

A strong economy generally supports higher stock prices because when companies generate higher profits, their stock becomes more valuable. In the 1990s, the combination of a strong economy and new technology made investors optimistic about the future.

Another crucial factor that fuelled the stock market’s rise in the 1990s was the Federal Reserve’s monetary policy. The Federal Reserve (or “the Fed”) is the central bank of the United States, and one of its main tools for influencing the economy is adjusting interest rates. When interest rates are high, it’s more expensive for businesses and consumers to borrow money. When rates are low, borrowing becomes cheaper, and this can encourage spending and investment.

In the 1990s, the Fed cut interest rates to support the economy, especially after a brief recession in the early part of the decade. These rate cuts made it easier for companies to invest in growth and for consumers to spend, which in turn helped fuel the strong economy and rising stock prices.

By the mid- to late-1990s, these factors; innovation, a strong economy, and lower interest rates, combined to create a boom in the stock market. From 1995 to 2000, the S&P 500, one of the main stock market indexes, tripled in value. This was an extraordinary rise, and many investors saw their wealth grow rapidly.

Now, let’s compare the conditions in the 1990s to what we’re seeing today. There are some striking similarities that suggest we could be on the verge of another major melt-up in stock prices.

Just as the 1990s were driven by the rise of the internet, today we are seeing major technological advancements that could reshape the economy. Artificial intelligence (AI), automation, renewable energy, and biotechnology are all areas experiencing rapid innovation. Companies involved in these sectors have already seen their stock prices rise, but we may only be at the beginning of a much larger wave of growth.

Much like the 1990s, investors are excited about the potential of these new technologies to transform industries, and as these innovations become more integrated into daily life, the companies leading the way could see significant gains in their stock prices.

While the global economy has faced challenges in recent years, including the COVID-19 pandemic, there are signs of recovery and strength. In the US, unemployment has been low, and there has been significant government spending aimed at boosting economic growth. While inflation has been a concern, it appears to be stabilising, and consumer spending remains strong.

A strong economy supports corporate profits, and as businesses continue to grow, their stock prices are likely to follow suit, just as they did in the 1990s.

Perhaps the most important factor to watch is the Federal Reserve’s monetary policy. After a period of raising interest rates to combat inflation, the Fed is now in a rate cutting cycle. If inflation continues to come down and the economy remains strong, rate cuts could create a favourable environment for stock prices to rise.

When we combine these factors; innovation, a strong economy, and the potential for lower interest rates, it’s easy to see why some analysts believe we could be on the verge of another melt-up in the stock market. Just like in the 1990s, the conditions are aligning in a way that could lead to a rapid rise in stock prices, especially if investors become increasingly optimistic about the future.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 30th of September 2024

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Many people think the Federal Reserve (the Fed) plays a huge role in controlling the economy by setting interest rates. But some experts argue that the Fed’s power might be more of an illusion. Let’s break down what this means and why it’s a big deal for everyone, not just those who follow finance.

The Fed is like the US government’s bank. One of its main jobs is to set a short-term interest rate called the “federal funds rate.” This is the interest rate banks charge each other for short-term loans. The Fed changes this rate to influence other interest rates in the economy, like those for mortgages, car loans, and credit cards. The idea is that by raising or lowering this rate, the Fed can help control things like inflation or stimulate the economy during tough times.

Recently, there’s been a debate about whether the Fed’s actions are really effective or if it’s just been lucky in controlling inflation through raised interest rates.

Some economists argue that while the Fed sets one rate, it doesn’t actually have much control over the important rates that affect everyday people. For instance, when the Fed raises its rate, you might expect mortgage rates to rise too, but that doesn’t always happen. Sometimes they move in opposite directions, or not at all.

New York University professor Aswath Damodaran is one of the experts who believes that the Fed’s power might be overrated. He argues that the Fed’s rate is just one of many factors that influence interest rates on things like mortgages and business loans. Sometimes, these real-world rates don’t change in line with the Fed’s rate changes at all. For example, between 2004 and 2006, the Fed raised its rate by more than 4%, but other rates, like those for certain corporate bonds, barely moved. This suggests that markets often ignore what the Fed does.

Damodaran and others say that real-world interest rates, like those on your mortgage or credit card, are mainly driven by two factors: how the economy is growing and expectations about inflation. Neither of these is controlled by the Fed. For example, interest rates were low before the pandemic not because the Fed kept them low, but because the economy was weak and inflation wasn’t a concern.

On Wall Street, the consensus idea is that the Fed is in control and its rate decisions affect the economy. If the Fed doesn’t have the power people think it does, then a lot of what investors and analysts focus on might be wrong. It would be like following rituals for a god that doesn’t exist.

This view has support. Financial Times writer Martin Sandbu has argued that the recent spikes in inflation were mostly due to supply chain issues and other disruptions, not because of anything the Fed did or didn’t do. If that’s true, then the Fed’s efforts to control inflation might not have had much effect.

Some say the Fed’s actions might matter during major crises, but even then, their impact is limited. For instance, in 2007, the Fed tried to prevent a recession by cutting rates, which initially boosted stock prices. But as the economy continued to weaken, those rate cuts weren’t enough to stop a downturn.

The Wall Street Journal’s Spencer Jakab recently compared the Fed’s chairman, Jay Powell, to the Wizard of Oz, powerful in appearance but not as effective as people think. He noted that during past crises, what really drove markets wasn’t the Fed’s rate cuts but broader economic trends, like whether the economy was growing or shrinking.

If the Fed is more of a follower than a leader, what should you do as an investor?

For one, you might not need to worry so much about the Fed making mistakes, like raising rates too high and causing a recession. Instead, paying attention to the overall health of the economy and how companies are performing might be a better strategy.

In 2022, many investors were nervous about the Fed’s actions and avoided risks, only to miss out on the gains of 2023. If they had focused on the economy itself rather than the Fed, they might have made different, and potentially better, decisions.

In the end, it’s important to remember that while the Fed plays a role, it’s not the all-powerful force many believe it to be. Understanding the bigger picture can help everyone make smarter financial choices.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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Monday 23rd of September 2024

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In many countries, the housing market plays a crucial role in driving economic growth. The US economy has long relied on multiple sectors, such as technology, manufacturing, and retail, to fuel its growth engine. But with rising government debt, stretched spending, and uncertainty in other areas, attention is shifting to housing, which has been a drag on growth in the US since the pandemic.

Housing is more than just homes, it touches everything from construction and real estate services to banking and consumer goods. When the housing market is booming, demand for materials like lumber, cement, and steel skyrockets. Contractors, architects, and real estate agents also benefit, and homebuyers typically spend on new furniture, appliances, and renovations. All of this creates jobs and boosts GDP.

The UK offers an interesting case study in how housing could be a major economic driver. With its strained public finances and limited ability to ramp up government spending, the new Labour government in the UK is now looking to housing as a way to stimulate growth.

The UK, like the US, is facing a significant housing shortage. A lack of affordable homes has driven up prices, leaving many people priced out of the market. This pent-up demand for homes represents an opportunity to build more and stimulate the broader economy.

Housing doesn’t just benefit homebuyers and sellers; it has what economists call a ‘multiplier effect’. For every home built, there is a ripple of activity across different industries. This makes it an attractive option for policymakers aiming to boost economic activity without increasing government spending.

The UK’s new government has recognised that building more homes and making the housing market more accessible could drive growth. Their focus on housing policy includes streamlining planning laws, incentivising developers, and ensuring that infrastructure projects complement new housing initiatives.

Could the U.S. follow a similar path?

The signs are there.

Kamala Harris has recently been discussing the potential for housing to play a bigger role in the US economy. The US housing market is massive, and just like in the UK, there’s a significant shortage of affordable homes. According to Freddie Mac, the US is short by 3.8 million housing units. This imbalance between supply and demand presents a similar opportunity to what the UK is now trying to address.

In the ongoing US presidential race, Kamala Harris has mentioned housing as a way to generate sustainable, long-term growth without relying on increased government spending. This is especially appealing at a time when the US national debt is over $33 trillion. In this context, the housing market could be seen as a vital lever to pull.

So, what does this mean for investors? If housing does become a key growth engine, then related stocks and sectors could see significant gains.

Companies that specialise in building residential homes are the most direct beneficiaries of a housing boom. If housing policies are enacted to stimulate more construction, these companies will be at the forefront.

A housing boom means increased demand for building materials too. Companies that produce lumber, cement, steel, and other key components are likely to see increased revenues.

This opportunity is compelling for investors. If housing does become the new growth engine of the US economy in 2025 and beyond, stocks related to homebuilding, construction materials, real estate services, and consumer goods could all benefit. Keeping a close eye on policy announcements and market trends could help you stay ahead of the curve and capitalise on this potential shift.

We would like to thank Dominion Capital Strategies for writing this content and sharing it with us.

Sources: Bloomberg, Yahoo Finance, Marketwatch, MSCI.

Copyright © 2023 Dominion Capital Strategies, All rights reserved.

Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.

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