Market Musings 150225: Market leadership rotation underway
Market Musings 150225:
Market leadership rotation underway
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Investment Strategy Focus February 2025 - The Trump Tornado
“Tariff Man” strikes again: President Trump has targeted Mexico, Canada, and China with wide-ranging tariffs, prompting retaliatory tariffs from Canada and China. Suspension of Mexican and Canadian tariffs post concessions suggests that these tariffs may not be permanent. If ultimately maintained, expect a -0.4% drag on the US economy and +0.8% on core inflation.
Can inflation ease further? Despite tariffs, inflation rates can ease further as i) oil & gas prices, ii) housing costs, and iii) wage growth should all moderate in the months ahead. Further rate cuts should benefit manufacturing activity, bank lending, and construction sectors.
A buying opportunity in US inflation-protected bonds: US 10-year real bond yields above 2% have historically resulted in 12-month returns close to 10% on average. With real yields now at 2.1%, we like US Treasury Inflation-Protected bonds. We also favour longer-duration US and UK sovereign bonds given higher term premia.
Deepseek disruption? Is the launch of this low-cost Chinese AI large language model the “Ryanair” disruptor to US mega-cap tech oligopolies? This accelerates the “commoditisation of AI” and may trigger sector rotation away from Technology. Favour equal-weight S&P 500, Financials & Industrial sectors.
A constructive 2025 outlook for private assets: certain private credit strategies offer attractive yield pick-up opportunities in a world of tight credit spreads. European commercial real estate offers high prospective returns from a nascent recovery in property values, rental growth and higher rental yields as interest rates fall.
The Unstoppable Rise of ETFs has Fuelled the Tech Sector
One very important factor behind the rise and rise of US mega-cap technology stocks such as the Magnificent 7 has been the rising dominance of ETFs.
Today, US ETFs have a far larger share of total assets than actively managed stock funds, while US households also have more of their total financial wealth invested in stocks (32%, over 40% if including exposure via pensions and insurance products too) than ever before.
Note that this exposure today to stocks (principally US stocks of course) is greater than even at the peak of the 2000 technology bubble…
ETF flows now dominate in the US
US household allocation to stocks at an all-time high
The success of the Magnificent 7 has fuelled greater and greater flows into these stocks and into the US Tech sector as a whole, with tech ETFs now taking a huge 40% market share of the huge flows into all equity ETFs.
And Technology sector ETFs dominate US ETF inflows in 2024-25
One word of warning, however. This current euphoria around tech stocks is becoming more and more vulnerable to a sharp change in momentum, given the fast-growing assets under management in leveraged ETFs, which deliver a multiple of the return of the underlying stock or sector, both up and down. In any market reversal, the unwinding of these leveraged ETF holdings could have a heavy impact on these widely-held technology stocks.
Record Risk in leveraged ETFs - could magnify any sell-off
This is why we prefer today more diversified exposure in US stocks via the S&P 500 equal-weight index or via US mid- and small-caps at this point, given the building concentration risks in the Magnificent 7 in particular.
US Tech no longer leading global stocks
Note that over the year to date, the Magnificent 7 are no longer leading the global stock market, only delivering a +0.2% return so far. This compares to 3.7% for the S&P 500, and +13.1% for the Euro STOXX 50 since end-December.
Tech v S&P 500: US Tech sector peaked in relative terms in July 2024
Mag 7 v S&P 500 ex Tech: While the Magnificent 7 tech stocks peaked in relative terms in December…
So what is leading, if not Tech?
In sector terms, US Financials (Banks, Insurance) are leading and are benefiting from a strong Q4 2024 results season and more reasonable valuations.
US Financials have led the US stock market since July
While in geographic terms, the World ex US and in particular the Eurozone has started to outperform the US, for the first time in a long time…
Eurozone stocks lead the US since December
Within Europe, Eurozone Banks remain the leading sector following a strong Q4 2024 results season. Despite the outperformance of the sector, Banks remain relatively cheap with good earnings momentum and generous dividend yields of over 5% on average.
Eurozone Banks lead the European stock market
Finally, the DeepSeek large language model news seems to have reignited interest in Chinese tech stocks, with the Hang Seng Tech index now entering a bull market (> +20% from the recent lows) led by big rebounds in Alibaba and Tencent.
Hang Seng Tech index makes new highs
Have a great week
Edmund
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10 comments
Just wondering if someone possibly Edmund or a-n-other could explain inflation linked bonds in a bit more detail.
My limited knowledge is you really need to know what your doing with this sector of the bond market as its super volatile and my understanding was you wouldn't want to get involved until you were pretty sure inflation has peaked ?
Happy to be corrected by someone who knows more than me.
Andy
Thanks Edmund, very interesting.
How, or where, could one invest in US inflation-protected bonds? Could this be done via an ETF such as SPDR Portfolio TIPS ETF (PCQ:SPIP), or another method?
Actually I didn't know leveraged ETFs were a thing. Scary. The ETF bubble has to burst. Relentlessly buying stocks that maybe have stopped performing has to be a losing strategy in the end. Once ETFs are over 50% the purchases can keep a dead duck in the index.
Edmund.I bought a eurostocks banks etf after your last update. An opportunity I would not otherwise contemplated. Merci beaucoup!
Good morning snowdrop, what was the ticker for the Eurostocks Banks ETF please? I looked at last weeks article from Edmund but couldn’t find it. This sounds very interesting.
May I ask which one you bought? I’ve been considering a similar move
Lyxor EURO STOXX Banks (DR) UCITS ETF - Acc (LON:BNKE) in£ not euro so currency risk too. Bought 21jan.Up 9% atm.Also called Amundi.
A chart that I really like is "growth vs value stocks".
https://www.longtermtrends.net...
It shows that growth stocks are priced relative to value stocks near their all-time high. This implies that growth stocks are greatly over-valued. Buyer beware.
Warren Buffett has sold quite a lot of his Apple (NSQ:AAPL) shares and has bought shares in an oil company, Occidental Petroleum (NYQ:OXY).
He is not keen on gold.
In the USA are not people putting money in monthly from their salaries into funds, therefore even if the market falls there will still be money flowing in, unlike the the UK market.
It is always the way, investor flows into the market peak just before the bubble pops. At the bottom no one (except Buffett) is investing. Two things stick out, the Mag7 with a 0.2% return YTD suggest they have topped out and will head down soon. Secondly the amount in levered ETFs are further evidence that when the downturn comes it will be brutal.
I suspect the smart money has already left and is now in gold and silver.