Last week we noted that Japan fell into a recession, so it may surprise some that this week we are commenting on Japan’s Nikkei index hitting an all-time high, surpassing the previous high which was set on 29th December 1989. It has taken 34 years for the index to get back to previous highs after the bursting of the Japanese equity bubble at the end of the 1980s. The Nikkei index has been on a tear in 2024, rising 17.5% (in local currency terms) and taking top spot for the best performing equity market this year.
The Japanese equity peak that was attained in 1989 was often referred to as the “iron coffin lid” as it became the symbol of Japan’s many years of economic stagflation. However, 34 years later that lid has been lifted, helped by a falling Yen which has boosted the exporters, while foreign investors have fled Chinese equities and found solace in Japan. Japan’s government will also have seen the benefits of their subsidised scheme, “savings to investments”, which allowed domestic households to invest into a Japanese NISA (Nippon Individual Savings Account). A scheme like this would certainly benefit the UK market and something that the Chancellor seems to be exploring ahead of the March Budget.
While the word “recession” can sound scary, we must remember that equity markets are forward-looking mechanisms, discounting the future as opposed to present and it is why equity markets often bottom and recover well before the economic low. Indeed, in the UK, the mid-cap index has historically delivered returns of around 20% in the following 12 months once a technical recession has started.
China appears to be making attempts to revive their property market and broader market as on Tuesday they announced a reduction in their benchmark mortgage rate. A 25-bps cut to their five-year loan prime rate is the largest cut since the rate was introduced in 2019 and now stands at 3.95%. Investors still however seem to be waiting for further support measures as although the rate cut was immediate, existing mortgage holders will not benefit from a loan repayment reduction until next year. A follow-up of cash injections into lenders, housing projects and developers is widely expected.
A lot of discussion around US markets over the past few months has been around the “Magnificent Seven” but we are certainly seeing Nvidia’s sway over the market growing at an absurd rate. Nvidia embodies the artificial intelligence movement as the semiconductor company’s chips are considered market leading. On Wednesday, Nvidia reported record revenues of $22bn for Q4 and full year revenue for 2023 of $60bn, leading to a market rally as the S&P 500 rose 2% and tech-heavy Nasdaq rose 3%. Nvidia added $250bn in market cap on the earnings news, the biggest single increase on record, and now stands just shy of $2 trillion in value. Who knows if we are in bubble territory, there are certainly parallels that can be drawn to 2021, however, it is clear that Nvidia is backing up the hype with very strong earnings growth and product demand.
There is positive news in the UK as energy bills are set to fall to their lowest levels in two years. From the month of April energy regulator Ofgem are set to cut the price cap by around 12%, equating to an average saving of almost £240 per household. This will be the lowest level since prices were raised as a consequence of Russia’s invasion of Ukraine in February 2022. Ofgem however are still facing the issue that a record £3.1bn remains in unpaid bills. Energy prices have been a significant contributor to rising inflation and as this continually falls, investors believe this could help bring inflation down to target of 2% by June.
Eurozone inflation has continued to ease as headline inflation (year-on-year) fell to 2.8% in January. Expectations of an ECB rate cut have recently been pushed back to May and it’s estimated the ECB won’t cut rates before the US Fed.
It’s been a fascinating week in markets, which was dominated by the results of one single company, Nvidia. Their recent success helped propel the majority of global indices higher as the belief around the artificial intelligence revolution increases. With such a high profile company posting significant gains there is likely to be an element of “FOMO” (fear of missing out), however, we continue to believe a well-diversified portfolio, across a range of asset classes remains appropriate. This will of course include Nvidia, alongside many other positions, and ensures portfolio performance is not dictated by one company.
Nathan Amaning, Investment Analyst
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