You're now leaving the Market Thinking website

Please note that you are about to leave the website of Market Thinking and be redirected to Toscafund Hong Kong. For further information, please contact Toscafund Hong Kong.


Insight - Making Sense of the Narrative


This year has been all about the Magnificent 7 mega cap Tech Stocks, who have contributed 95% of all the S&P Return. But then so was last year, when they subtracted an almost identical amount in terms of Contribution to Return. So what for 2024? Those who bought in January were buying value in heavily discounted growth, an argument that doesn't hold this year. Many who bought in q3 were chasing momentum and/or short covering underweight positions. Neither of which are sustainable strategies. The story we are currently telling ourselves is AI, but that is going to have to translate into heavily superior earnings from here.

Fifteen years ago Ben Bernanke had to ask for $700bn to bail out the US Financial system otherwise "We might not have an economy on Monday", but the often overlooked reason why a financial crisis became an economic one was the role of the Money Market Funds which were effectively funding corporate working capital through Commercial Paper markets. When they froze, so did the economy. Fifteen years on, they are once again dominant, but this time crowding out bank deposits rather than bank loans. Let's hope they don't cause a similar, but different liquidity problem this time.

UK Inflation is driven by essentials like Food, energy and Housing - the cost of living crisis. The BoE's policy appears to be to raise 'taxes' in the form of higher mortgage costs to 'tame' this inflation. The only way this will work is to completely collapse demand for everything else. Crucially, the orthodoxy ignores the impact interest rates have on supply, rather than demand - lower rates increase supply and lower inflation, higher rates do the opposite. Bond vigilantes think this policy will support their market (which is why they are demanding 'credibility'.) Far more likely is stagflation, which is bad for everyone.

The recent squeeze in Mega Cap tech is actually part of a recent series of gyrations between Tech and Energy that was stimulated by the arrival of huge flows into ESG and has been exaggerated by front running both their inflows and the flows around momentum investing strategies that have been rebalancing

Including this year to date, Chinese Equities are down for the third year in a row, while Japanese Equities are up for the fourth year in five. Covid, Geopolitics, and Index weightings for diversification are all part of the story, but we also think that just as western models that assumed low interest rates would cause inflation singularly failed to recognise their role in a savings based culture as return on savings on the downside, so they are also missing the point that higher rates will generate higher demand and inflation in Japan