Major investors say the global economy is strong enough to withstand a bubble in artificial intelligence and turmoil in private credit markets despite a sharp fall on Wall Street and the ASX over the past week.
The local sharemarket tumbled to a four-month low on Friday as investors erased $37 billion in value on concerns that interest rates in the US and Australia were falling any time soon.
Tracking Wall Street’s biggest one-day fall in a month, the S&P/ASX 200 index dropped 1.4 per cent, or 118.9 points, to 8634.5 – a level last seen mid-July. The index has fallen about 1.5 per cent over the past week.
Despite the slump, billionaire American hedge fund manager Dan Loeb said he was “generally optimistic” about the outlook for equities.
“It doesn’t mean that we won’t have some ugly days and weeks along the way. That’s what makes a market, but I’m pretty constructive,” Loeb, who co-founded high-powered New York investment firm Third Point, told fund managers at the Sohn Hearts & Minds conference in Sydney on Friday.
Loeb also said he wasn’t worried about the Federal Reserve’s moves as hopes of a December rate cut faded.
“The Fed has told you that they’re not going to lower rates, which they would do if they saw some signs of weakness. The first half of next year, I expect to be pretty strong,” he said.
A growing number of Federal Reserve officials this week have signalled hesitation about more interest rate cuts. Bond traders have subsequently lowered the odds of a December rate cut to nearly 50 per cent, from 63 per cent a day earlier and 95 per cent a month ago.
“The market was far too optimistic about what the Fed could deliver, which has generated high valuations at a time when tech now has a very symbiotic relationship with surrounding industries,” said Perpetual head of investment strategy Matt Sherwood.
“The upcoming data deluge in the next few weeks could alter ... the justification for extreme valuations.”
Wall Street fell as worries about stretched valuations for AI and other technology stocks have grown, particularly given the US government shutdown has deprived investors of key economic data. That shutdown has ended this week after 43 days, although the economic indicators remain delayed.
Loeb is one major investor who believes there is a bubble in technology stocks, but told the conference it was not “at Microsoft or Amazon”. Instead, he said speculative capital had flown into smaller stocks in the sector.
“We saw inexplicable valuations around companies like [cloud computing infrastructure operator] CoreWeave,” he said. “The more mainstream companies didn’t go up as much, nor do I think they’ll correct as much.”
His comments come amid broader concerns that the Federal Reserve will stop lowering interest rates, forcing investors to reconsider whether risky assets would get a boost from cheaper money.
The S&P500 index slid 1.7 per cent during Thursday’s session while the tech-heavy Nasdaq lost 2.29 per cent after central bank officials cast doubt that policy rates would be lowered when they meet in December. Nvidia, the focus of much of the interest in AI-related stocks, fell more than 4 per cent as the US sell-off dragged Australia’s benchmark share market lower.
Still, doubts about excessive valuations and persistently higher rates have slowed a sharemarket rally that was on track to repeat the near 20 per cent rise last year. Australia’s benchmark index had gained as much as 10 per cent but has given back half of those gains over the past month.
London-based hedge fund manager Michael Hintze, speaking at the conference, said he also believed that the market’s largest stocks were not overvalued based on the earnings growth they were delivering.
“A $US5 trillion ($7.7 trillion) company looking cheap to me. It’s bizarre,” Hintze, who was raised in Australia, said about Nvidia. The company is expected to grow its profits by 35 per cent over the next 12 months.
Beyond the potential for a bubble in AI valuations, investors are worried about problems in fast-growing credit markets. High-yield credit spreads – which measure the compensation investors are prepared to accept – has narrowed to the lowest levels since the global financial crisis.
Meanwhile, failures are ticking up in the private credit markets as high-profile defaults and write-offs have rattled confidence in the $US1.5 trillion market.
Still, Loeb was also upbeat about the growth of private credit, which has concerned regulators around the world, including the Australian Securities and Investments Commission.
“Everybody’s focused on some of these scary headlines about frauds and mis-markings and some of the canaries in the coal mine in the credit market,” Loeb said. “But I don’t think it’s going to be systemic. I’m glad we have another trillion-and-a-half-dollar [funding] market.”
Others are cautious about the outlook for financial markets and excessive technology valuations. New York-based Matthew McLennan, who oversees the $100 billion First Eagle value fund, has piled into gold.
McLennan said the near 50 per cent rise in the gold price was evidence that more investors were worried about the debasement of financial assets as governments accelerate their debt issuance.
“The precious metal markets have sent a warning sign,” he said while also pointing to a rise on bond rates. “The 1970s and early 80s showed that the price of gold can go parabolic relative to the level of debt outstanding.”
This article was originally posted by The Australian Financial Review here.
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“The Mooch”, as he’s affectionately known, is a man in high demand. He’s flown into Sydney to headline the Sohn Hearts & Minds conference at the Opera House, an investment community jamboree that raises money for charity. He landed in London the night before, and will leave Sydney the next day for the brutal 24-hour return to New York.
Australian investors should be more worried about China than sweating on Federal Reserve independence and other market obsessions to do with Donald Trump, says billionaire conservative Baron Michael Hintze.
Beyond Wall Street, The Mooch is better known for his cutting takes on US politics in the popular podcast The Rest is Politics: US, which he hosts with BBC’s long-term North American correspondent Katty Kay.
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