Head of Equity Strategy
Summary: In this week's update to our Saxo Strats core equity themes we zoom in on our bubble stocks basket which declined 10% last week as equity sentiment took another step lower due to increased geopolitical risks, higher interest rates, and a worse than expected US inflation figure. The problem for bubble stocks, which are companies that have excessive equity valuations coupled with negative earnings expectations, is that valuations are still very high and with potentially higher interest rates downside risks remain high. We also highlight China's little giants basket as the part of the market was the only bright spot up 3.5%.
Another negative week for bubble stocks
Last week was another bad week for equities driven by geopolitical escalations around the war in Ukraine, higher long-term US yields, and a worse than expected US September CPI figure on Thursday taking the core inflation to the highest levels for the cycle. The current annualized rate of core inflation is now around 7.2% suggesting upside risks to the current pricing of peak US policy rate at around 5% in May next year. Global equities were down 1.7% last week with most of our theme baskets underperforming. The worst performer was the bubble stocks basket down 10% for the week.
The table below shows the 40 stocks that are part of the bubble stocks basket which aims to provide exposure to companies with negative earnings expectations and high equity valuations defined on the 12-month forward EV/Sales ratio. Despite the basket is down 73% from its peak in 2021 the median 12-month forward EV/Sales ratio is still 7.5x which in a historical context is still a very high ratio. It is also worth noting that while sentiment has changed dramatically and interest rates may move even higher, the vast majority of analysts tracking this part of the market are still extremely bullish on this group of growth stocks with the median price target being 79% above the current price. Another variant of the bubble stocks or disruptive growth segment is the Ark Innovation ETF which last week hit a 5-year low (see chart).
China’s ‘little giants’ were only bright spot
As the performance overview table shows, Chinese consumer and technology stocks were also under pressure last week down 7.4%, but at the other end of the spectrum in Chinese equities the China’s little giants basket was up 3.5%. The ‘little giants’ phrase encompasses companies in China that has got the label ‘little giant’ which means that the company has some technology that the government deems to be important for the future of China; these companies typically operates within semiconductors, advanced manufacturing, energy, and critical minerals. This label gives certain benefits as better access to financing and government support. Back in early September, China named more companies ‘little giants’ expanding the list to around 9,000 companies with the goal of 10,000 companies on the list by 2025. Not all of these ‘little giants’ are publicly listed and those that are listed are not necessarily tradable on Saxo’s trading systems. The list below highlights the constituents in our China ‘little giants’ basket which are all available in Saxo’s systems.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist
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