During October, European equities posted mixed performances, with the Stoxx Europe 600 index, which has a high weighting of defensive companies (consumer staples, pharmaceuticals), rising by +2.0%, while the Euro Stoxx 50, another benchmark index for the continent with a higher weighting of cyclical companies (banks, industrials), fell by -2.1%. U.S. stock markets saw technology stocks come under pressure, with the Nasdaq losing -3.7% but the S&P 500 rising by +0.7%.
October will therefore go down as a turbulent month, with a very sharp sector rotation and probably a significant reduction in leverage by the large hedge funds in the market, which triggered violent moves. Among other things, Alphabet, Google’s parent company, fell sharply, and Intel suffered a mini-crash on the day they reported earnings. Stocks linked to artificial intelligence in all its forms (data center construction, semiconductors, hosting providers, etc.) came under heavy pressure. Investors do indeed seem very concerned about a possible peak in the investment cycle in this area.
It must be acknowledged that the increases in AI-related budgets over the past four years have been absolutely staggering, and that it is entirely legitimate to fear a reversal—or, in other words, the deflation of a bubble.
The panic began in early October, when specialised players in the cloud sector, dubbed “NeoCloud” in our jargon, attempted to issue debt in the markets and quickly struck by a most frosty reception. CoreWeave, their flagship, then saw its debt come under heavy pressure. Its investment plans through the end of the decade are so ambitious that it absolutely needs unrestricted access to the bond market to finance its projects. It was only a small step from there to concluding that the wave of data center construction would come to an abrupt halt, and the market eagerly took it without giving the matter any further thought.
The late-month earnings reports from leading industry players, including Alphabet, Microsoft and Amazon, were scrutinized and penalized at the first sign of even the slightest hiccup. Yet a careful study of the figures shows that AI-related businesses are not disappointing—in fact, quite the opposite. Rather, it is the legacy businesses, such as Amazon’s e-commerce operations or Google’s search-related advertising, that are losing momentum, either because of consumer weakness or as a result of substitution.
We therefore believe that the market may have been a little hasty in burning what it had worshipped for the past four years and worshipping what it had burned for so long. We have therefore decided to maintain our positions in this sector for the time being, although they had already been reduced to reasonable levels several months ago.
The other concern for the markets remains the threat of a further escalation in the Persian Gulf and the resulting rise in energy prices, both oil and gas. Here too, we continue to believe that the worst is not inevitable, as both sides know they have nothing to gain from an uncontrolled escalation.
Clartan funds posted mixed performance this month, with the defensive funds naturally holding up best: Valeurs fell by -1.7%, Europe by -0.7%, Ethos rose by +1.2%, Flexible by +3.1%, Patrimoine by +1.5% and Multimanagers fell by -0.5%.
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Past performance is not indicative of future performance.
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Clartan Associés is an asset management company licensed by the AMF under number GP-90095.
