AI vs the rest
October saw broadly positive returns from Milford funds as global share markets extended their positive run. Technology stocks led the way, but there were strong performers elsewhere too. Local NZ and Australian shares lagged and bond markets were choppy.
The AI technological revolution is akin to a gold rush, and large US technology companies are investing heavily in a race to take the spoils. This spending is boosting earnings for companies that provide the technological infrastructure, particularly the expensive semiconductors that facilitate the AI technology. Last month these ‘picks and shovels’ companies extended their gains with Nvidia (+7.2%) and Micron (+21.8%) examples of these companies that we also own.
Non-technology stocks have been somewhat lacklustre recently, and NZ and Australian share markets were broadly unchanged last month. But investments further afield in places like the UK continue to perform for us as the inflation problem there appears to be cooling. UK bank NatWest Group (+10.7%) and utility company SSE plc (+10.6%) are just two examples of stocks we own that are benefitting from a potentially more aggressive easing cycle from the Bank of England.
Bond markets had rallied over recent months but there were signs of a reversal last month as investors had been overly expectant of future interest rate cuts from the US central bank. Sticky inflation data in the US (as well as in places like Australia) has elicited some caution from central banks in determining the amount of further easing that is required. This repricing saw US bond yields rise from their lows last month and also drove a stronger US dollar. Milford bond funds continue to outperform underlying markets, delivering positive returns last month.
Looking ahead, the global economic outlook is improving as interest rate cuts flow through, and government spending remains robust (e.g. in US and Germany). Broad asset prices are elevated but not without opportunity. In fixed income, the UK is our preferred exposure whilst also offering ongoing value in parts of the share market. Shares are broadly expensive, but this reflects enthusiasm around the AI theme. We continue to ride this theme but also find value in many non-technology stocks locally and globally.
