Capital Crunch
October saw significant rotations within markets and across asset classes, though broadly within the ranges of recent months. Index-level moves were mixed, but tech-heavy US markets fell sharply. The AI optimism of September gave way to concerns about the sustainability of the AI build-out and the potential for over investment, dragging tech-heavy US share markets lower. This churn produced a range of outcomes across Milford funds, with lower-risk funds outperforming higher-risk funds.
Concerns about how the AI boom is being financed intensified through the month. The ever-increasing capital required, coupled with doubts over the revenues needed to support the debt, saw technology stocks retreat from recent highs as earning growth, despite being strong, missed elevated expectations. Broader share markets were buoyed by a rotation into nontechnology stocks, many of which had previously soldoff on concerns about rising bond yields. Regionally, markets with lower technology weightings fared better, with Australian, UK and European shares broadly outperforming the US. Sector-wise, energy and healthcare sectors were solidly positive, helping share markets avoid a material correction and illustrating the benefits of diversification across sectors and regions.
This divergent performance was evident across our holdings, with tech stocks like Google (-18.3%) pulling back while stocks like US cell towers company Crown Castle (+33.1%) benefited from the rotation to non-tech stocks.
In bonds, the sharp, multi-month sell-off abruptly reversed as investors extrapolated a risk of a slower AI buildout into slower economic growth. Bonds delivered solidly positive returns, with price gains adding to interest earned. A surprise OCR hold from the RBNZ further helped our sizeable NZ bond position. We remain measured on the broad outlook for bonds but are encouraged by their ability to diversify portfolios should growth slow more materially.
Looking ahead, the run into year-end and post the US mid-term elections is typically a seasonally strong period for shares, and powerful earnings trends and solid economic growth support that view. Our enthusiasm is tempered, however, by near-term headwinds to the AI narrative, ongoing geopolitical concerns (notably Middle East energy risks) and building headwinds to global economic activity. A continuation of the rangebound conditions of the past three to six months is a more reasonable expectation. In an environment with this many moving parts, we are open minded to the path forward. Although we’ve seen stubborn inflation and central banks willingness to raise rates, we remain positioned to participate in further equity gains, with the flexibility to adjust quickly across shares, bonds and currencies as risks and opportunities evolve.
