Barely a week passes before another major sharemarket hits a record high, driven by investor exuberance over the potential of artificial intelligence (AI).
In contrast, the New Zealand sharemarket, with its high proportion of defensive, dividend yield stocks, has remained a spectator, the S&P/NZX50 index trading well below its January 2021 peak.
Overseas, seemingly unstoppable stock markets have prompted fears that the AI phenomenon may have created a bubble.
As the Economist pointed out this week, there’s little wonder a sense of unease is settling over markets.
“Some 40 per cent of global fund managers think that artificial-intelligence stocks — a crucial driver of the rally — are already in a bubble,” the Economist, citing a Bank of America monthly survey, said.
“Even Wall Street’s most starry-eyed pundits reckon America’s S&P 500 index of leading shares can eke out only minor gains in the remaining nine months of the year,” the paper said.
The explosive debuts of former United States President Donald Trump’s social media business, Trump Media & Technology Group (TMTG) and Reddit have added weight to the bubble argument.
TMTG has never turned a profit, yet its market capitalisation this week came to US$12 billion ($20b). The company, which operates Truth Social and plans to launch a streaming service in the next year, lost US$49 million in the first nine months of 2023 and reported US$3.4m in revenue.
But as Salt Funds managing director Matt Goodson wryly noted: “It’s only a bubble if you don’t own it”.
Economist Robert Shiller, who successfully called the end of the dot-com boom, says there is always a fundamental story that gets bubbles going.
“If you think back to the late 1990s, it was the promise of the internet that got the NASDAQ bubble underway,” Goodson says.
“This time it’s AI, and clearly it is really in the early stages.
“There may well be some stocks, which have already risen a lot, which ultimately have further to rise, because they have a real business niche that is leveraged to that AI story, and the size of that will only become apparent over the next five to 10 years.
“By the same token, there are a lot of fellow travellers that may not have anything, and will doubtless fall hard, I suspect.
“There will be a few winners, and a large number that will disappoint from here.
“But you will need a very good crystal ball to pick them out.”
This year’s success story, Nvidia, has risen by 1.5 per cent a day so far this year.
Interest in the world-leading AI company is such that there is now an exchange-traded fund (ETF) just for Nvidia. The ETF alone is worth US$2.3b.
“There are a lot of signs of extremely fast, speculative money jumping on to the quite robust, initial, fundamental AI story.”
Classic bubble-style behaviour can be seen in the initial public offer market for stocks such as Reddit, which have traded at big premiums despite having less of a connection to the AI story.
“You get this circularity of money being leveraged into the market, which only tends to get broken by some out-of-left-field event.
“From what I can see, we are in that phase of the market where volatility has fallen so much, you have seen risk budgets explode higher, and all that money is flooding into the market,” Goodson said.
“It certainly has a lot of bubble-like characteristics, but I would argue that the bubble elements apply chiefly to the stocks that have moved that have no real relationship to the AI story - and there are a huge number of stocks like that.”
Analysts rejigged their 12-month target prices on Fisher & Paykel Healthcare after it lifted its full-year guidance but retained fairly downbeat ratings.
Last Friday, the healthcare products manufacturer lifted its full-year revenue guidance to $1.73b, from $1.7b, and net profit to $260m-$265m, from $250m-$260m.
Forsyth Barr analysts lifted their target price to $23.45 from $22.95. The shares have risen sharply since last Wednesday when they were trading at $23.95. Yesterday they opened at $26.45.
They noted that F&P Healthcare referenced stronger hospital consumables revenue and “homecare revenue is tracking ahead of our prior expectations. Also, the underlying new apps trends remain constructive”.
However, they retained an underperform rating “given FPH’s relative valuation to global healthcare peers remains elevated, and our concerns around the new apps consumables revenue growth required over the long term to justify the current share price”.
“Valuation has been a share price constraint for some time for FPH, and we expect this to continue near term,” according to Forsyth Barr.
Jarden analysts lifted their target price to $23.20 from $22.00 but also retained an underweight rating “on valuation grounds and with FPH going through an educational investment phase to support its top-line growth over the next few years”.
According to Jarden, the key up and downside risks are the pace of clinical practice change, the penetration of new products and geographies and New Zealand dollar volatility.
Macquarie analysts lifted their 12-month target price to $26.30 from $24.40 and retained a neutral rating.
“While acknowledging a favourable medium to longer-term outlook (increased uptake within addressable patient populations, improved operating leverage) and signs of improved device utilisation, we look for greater valuation appeal.”
The key downside risks to Macquarie’s target price and rating primarily relate to weaker-than-expected global hospitalisation trends, impacting hospital device and consumables revenue, representing the largest proportion of revenue for FPH.
Upside risks relate to better-than-expected hospital device utilisation, obstructive sleep apnea/homecare sales and operating leverage.
Black Rock chief executive Larry Fink, in his closely followed letter to chief executives and investors, warned that the world faces a retirement crisis.
“We focus a tremendous amount of energy on helping people live longer lives. But not even a fraction of that effort is spent helping people afford those extra years,” he wrote.
“Today in America, the retirement message that the government and companies tell their workers is effectively: ‘You’re on your own’.”
By the mid-century mark, one-in-six people globally will be over the age of 65, up from one-in-11 in 2019.
Fink, who has drawn some flak for his support of ESG (environmental, social and governance) investing, particularly from the Republican Party, said the war in Ukraine “lit a fresh spark” under the idea of energy security.
-additional reporting BusinessDesk
Jamie Gray is an Auckland-based journalist, covering the financial markets and the primary sector. He joined the Herald in 2011.
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