We approach the final part of the year with a market sentiment that goes from pessimism to euphoria in a few days, sometimes even in a few hours. We commented last month how the FED went into accommodative mode, ending August with euphoria, the FED lowered rates this month and now the market is once again focusing on whether there will be more cuts. We return to a “worse is better” situation; once an economic recession is ruled out, the market prefers to see bad indicators, which would allow it to continue lowering rates. In short, imitating a certain politician, if “bad not too bad is good” if “bad bad is bad” if “good not too good is good” and if “very good is bad”. I have not gone crazy, although I understand that it takes you a few minutes to understand it, but believe me, in these sentences it is summarized how to understand the ups and downs of the market at this time.
We have always believed that the noise of the short term leads you to make wrong decisions, most of the time “doing nothing” is the best decision as long as you believe that the bottom line has not really changed. Now, the trendy topic is talking about the AI bubble and you will get bored of seeing many people comparing Nvidia today with Cisco in 2000. I feel that it is an eternal debate, which usually appears as the markets hit new highs, the apocalypse looms for the umpteenth time in our heads. The differences with the year 2000 are very important compared to the current situation. The writer of these lines had the “honor” of experiencing the technological bubble of the year 2000 in situ, already as an investment fund manager, and it is necessary to explain the great differences between both periods. First, the bubble of the year 2000 was accompanied by price increases that in no way corresponded to the accounting increase in profits and sales of the companies of the time. Nowadays that does not happen. I remember how at that time analysts valued internet companies based on the number of “clicks” that were made on the banners. Secondly, at the birth of the Internet we saw great ideas, but there was an economic reason that caused the bubble to burst, the companies did not know or could not monetize the business on the Internet, therefore, the beginning of the fall occurred at the moment when everyone realized that the industry did not yet have the capacity to do cold business. Obviously, also with AI there is a risk of overcapacity, however, the adoption of AI to a greater or lesser extent is increasingly not something that only large technology companies are doing, its adoption in many cases will mean that companies of all types and sizes will allow them to remain competitive or not. Our position is very pragmatic, we trust in AI, but we only believe in the benefits they generate and that is the only thing we are going to continue evaluating, that they agree with the assessments, as long as that happens we will continue in the boat.
The consensus says that there is concern about the valuations of the Magnificent 7, it cannot be generalized, for example, Amazon has fallen far behind for no specific reasons and Nvidia has nothing to do with Microsoft, however, they all have a common denominator, strong profit growth. We are more concerned about the pyrrhic increase in profits in some market areas that, curiously, the consensus considers “cheap”, in short, for different tastes…
Jordi Martret
Investment Director – NORZ Patrimonia