Susannah Streeter, Chief Investment Strategist, Wealth Club: “The crisis of confidence over heady tech valuations has intensified with a sell-off spreading across markets. This nervousness is combining with trepidation about the escalation of conflict in the Middle East as higher energy prices look set to bed in. Asian equities took another dive, with Japan’s Nikkei falling by almost 6% and the Taiex in Taiwan tumbling by more than 6%. Wall Street stocks also look set to open deep in the red. However, the tech-lite nature of London’s FTSE 100 is giving the index more resilience, with the index gaining ground after a stumbling start. Although it’s far from immune to jitters about global economic prospects, investors are still seeking out more stable prospects amid this bout of tech volatility. The mix of energy, defence, consumer staples, pharma and financial stocks can be more attractive prospects amid an upturn in geopolitical tensions, higher oil prices and high-tech uncertainty.
The outsized might of chip stars on indices has been causing these waves of turbulence as sentiment has begun to sour after their breathtaking climbs upwards. Results from TSMC, Taiwan Semiconductor Manufacturing Company, appear to have triggered this latest sell-off, which has spread to other big names in the sector. Even though the world's biggest contract chipmaker once again demonstrated that demand remains exceptionally strong, investors have become increasingly concerned about the sheer scale of spending by hyperscalers and the risks associated with deploying such vast sums into technology evolving at breakneck speed. The world's biggest contract chipmaker reported a whopping 61% year-on-year increase in second-quarter net profit, but also highlighted plans to invest US$100 billion in expanding advanced chip manufacturing capacity in the United States. While the huge scale of this commitment highlights management's confidence that demand from customers such as Nvidia, AMD and Apple will remain strong for years to come, concerns are brewing about whether these assets will remain technologically competitive long enough to generate attractive returns to justify the spend. Given the rapid pace of innovation in AI chips and computing architecture, there is a risk that equipment could become outdated, forcing operators to replace it sooner than expected. With the infrastructure build-out phase taking longer than some anticipated and returns further off on the horizon, it’s prompting a rethink about how much investors are willing to pay for companies exposed to the AI supply chain.
Investors are also increasingly wary about the prospects of another flashpoint emerging in the Middle East, which could further snarl up energy supplies. Tehran's call on Houthi rebels to be on standby to close the Bab el-Mandeb Strait, the key Red Sea oil route, should the US attack Iranian infrastructure, adds yet another layer of geopolitical risk to an already fragile energy market. Brent crude, the benchmark, is oscillating around the $84-85 level, up around 12% on the week and hovering at one-month highs. There remain expectations that some kind of deal will be reached, especially with the US inching closer to the mid-term elections, when gas prices will be a hot topic on the campaign trail. But it’s clear that what was intended by the Trump administration to be a decisive and successful short-term campaign has been anything but. The conflict has opened up a can of worms when it comes to the control of key waterways in the region, highlighting how easily strategic maritime chokepoints can become geopolitical leverage points, threatening global energy supplies, disrupting trade flows and fuelling volatility across commodity markets.
Netflix results have also served as a reminder that, after a prolonged rally in growth stocks, strong results alone are no longer enough to satisfy investors. While the streaming giant delivered a 9% increase in second-quarter profit and 13% revenue growth, its slightly lower-than-expected revenue outlook for the current quarter was a disappointment, especially in an environment where investors have got used to blockbuster earnings. Shares dipped sharply in after-hours trade as questions mount about where the next spurt of growth will come from, especially after Netflix was pipped to the post by Paramount in the battle for Warner Bros.’ streaming assets. Concerns are creeping in about where growth will come from and that the company will depend increasingly on price increases, hard won advertising revenues and incremental subscriber gains rather than transformational move. However, the twists in Paramount's own takeover story are a reminder that the strategy of buying growth prospects can come with plenty of problems. What initially looked like a missed opportunity for Netflix has become a far more complicated picture, with Paramount's proposed deal now facing a federal antitrust lawsuit brought by 12 US states as well as regulatory scrutiny in the UK. While Netflix may have lost the bidding war, it may also have avoided years of legal wrangling and regulatory scrutiny. If the Paramount-Warner Bros saga becomes even more bogged down, investors may ultimately conclude that discipline rather than deal-making was the wiser course.
Burberry revealed a chequered update, putting its best foot forward in key markets like the US and China, but has had to turn its collar up against the inclement spending conditions caused by conflict in the Middle East. Even though the turnaround strategy under CEO Joshua Schulman is showing signs of progress, the results show that the luxury market is far from immune to the forces swirling around the global economy. Sales across Europe, the Middle East and Africa fell 3%, showing just how quickly sales can evaporate when tensions rise. Luxury retailers have become increasingly dependent on the wealthy tourists traipsing through major shopping hubs, from London and Paris to Milan and Monaco, and with so many routes disrupted due to the conflict, shopping trips have been fewer and far between. This is partly why the stock has fallen back in early trade by 3.5%, despite overall comparable store sales rising 5% in the April to June quarter. A rebound in fortunes in the US and China helped move the dial. Burberry has been particularly successful in the American market, where sales surged 12%. Brand elevation has been key, but Burberry is also likely to have been benefiting from increased wealth perceptions among well-heeled US shoppers, whose fortunes are so closely intertwined with stock market valuations. The heady heights reached by big tech have bolstered trading accounts and, as profits have been booked, some will be channelled into must-have goods. But there are risks ahead, especially if volatility continues, as the current tech stars see more of a swipe taken at valuations. That leaves Burberry balancing on a tricky catwalk right now. While its underlying recovery appears to be gathering momentum, helped by a revitalised brand focus and improving demand in key markets, luxury spending is ultimately built on confidence, which risks being increasingly tested.”
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