Boldly taking on the Triple Frontier
U COMMENT Matthew Parkinson, fund manager at Waverton, discussed bank interest rates, AI, and geopolitics at the conference
The narrative in markets continues to be driven by speculation on when central banks will start to cut interest rates this year; how the excitement around artificial intelligence (AI) is best invested in, and concern that “geopolitics” could be the thing that derails the above constructive backdrop.
Our view at Waverton remains that, while we agree with the market consensus that inflation will continue to revert toward 2 per cent this year on both sides of the Atlantic, the presumption that the Federal Reserve will cut interest rates three or four times by January next year could be too aggressive.
The US economy continues to show positive momentum and even though we have the longest inversion of the yield curve – ten-year to threemonth – in history, and the most persistent weakness in leading indicators on record without a recession, there is little sign of a material slowdown on the horizon. The market may further pare back how many US rate cuts we see this year.
In the UK and euro area, we are more likely to meet market expectations of three cuts here and on the continent. Growth is very sluggish and inflation expectations in the euro area in particular are muted. So the shift in monetary policy from the tightening that we saw in 2022 and last year will likely happen and that should be supportive for markets.
The possibilities that AI is creating are justifiably exciting. This is reflected by the fact that while the share price of Nvidia, for example, appears to have gone into the stratosphere, unlike in the TMT [technology, media and telecoms] bubble in 1999-2000, the earnings of the company have also been explosive.
The share price performance of Nvidia looks similar to that of Cisco, a key beneficiary of the internet boom in the TMT bubble. The share price of Cisco today is 40 per cent below its March 2000 peak.
The problem throughout the TMT bubble, however, was that the darlings of that time were neither very profitable nor cash generative.
In 2000, Cisco was trading at 100 times its 2002 estimated earnings. Nvidia today trades at 32 times its 2026 estimated earnings.
We don’t own Nvidia in our Recommended Portfolio (with AMD our preferred chip developer pre and post the Ai-hype of early 2023), but we do own other members of the “Magnificent Seven”, in particular Microsoft and Amazon.
Theses companies trade at 26 times and 25 times 2026 earnings estimates, supported by growth expectations that continue to move higher, and very profitable and cash generative business models.
But, will any of the above be disrupted by geopolitics? Shocks such as a worsening war between Russia and Ukraine or an escalation of tensions in the Middle East could impact markets, but are unlikely to cause a major dislocation.
The US election looks like a rematch of Biden versus Trump, but the US stock market is unlikely to be too phased by the outcome. Trump cut taxes and was light touch on regulation in his first term. Biden has sustained economic growth with robust fiscal spending in 2021-22.
Here in the UK, a Labour government is the most likely outcome of the General Election to be held later this year. The bookies think Labour will get an overall majority in the House of Commons, but there is no sign that this is causing any tremors in the equity, bond or currency markets.
Our focus at Waverton continues to be on fundamental macro and corporate (micro) factors and to not get distracted by geopolitics.
Shocks could impact markets, but are unlikely to cause a major dislocation