“No, we are not in 1999.” This is not a reference to science fiction movies, time travel or dystopian realities. Now there is no technological bubble, compared to the period that preceded the famous crash of 2000, when the wave speculative Internet companies, which at that time were called dotcoms, collapsed on the stock market and caused the collapse of the Nasdaq. Yves Bonzon is global director of investments at the Swiss bank Julius Bär. He was in Barcelona this week to meet with clients to whom he explained why What was one of the few optimists about the stock markets in 2023. And why does he continue to be so: technology, with the arrival of AI, is driving this rally.
The seven sisters (Apple, Alphabet, Meta, Amazon, Nvidia, Microsoft and Tesla) of Wall Street alone dominate 28% of Wall Street like almost never before in history. Is it sustainable?
In October 2022 I said that the SP500 index had hit the bottom. They all looked at me with wide eyes. We had to consider that we were coming from a very special bearish cycle, six months of declines with a loss of more than 20%. But, for the first time in 100 years, there was no decline in corporate profits. Therefore, this decline was only a consequence of the rate hike. There were companies like Meta that had spent too much and saw a drop in their cash flow, but they made adjustments. From there, the profits of the seven main technology companies rose more than the prices.
These companies are worth the sum of the GDP of Germany, India and Japan. But we’re not in 1999.
No! At that time we lived in a market that was sustained thanks to liquidity, especially from central banks. Remember? The Fed lowered rates after the Asian crisis and there was fear of the millennium bug. The ECB had to support the entry of the euro. Until March 2000 when the Nasdaq crashed. This time the rise is based on solid fundamentals, there is no bubble. Maybe there is a company that is a little more expensive than its sisters… Okay, in general they are not cheap, but in the end stock market valuations are more about art than science. If there is a bubble, it is in profits. I mean that we cannot talk about bubbles when these companies make profits in a context of rising interest rates.
What makes you think this is sustainable?
It was 2015, I was speaking in front of an audience in Lugano. Do you know what they asked me?
¿…?
They asked me when I was going to burst the technology bubble! I told them that the question was incorrectly formulated. She was invalid. You can’t explode something that doesn’t exist. Eight years have passed since then and look. Let’s take the example of another smaller company in this sector, Oracle. Larry Ellison in the last fifteen years has doubled his stake in the firm without directly purchasing a share, but through the cash flow of Oracle, which has implemented a share repurchase policy. It’s like Ellison took money out of an ATM. How are you going to stop that? Now to not invest in the stock market you must really have a good reason to allocate your money to something else.
And the Chinese technology companies that were called to compete with the American ones?
In 2019 we believed that China would be one of the countries with the most opportunity of the 1920s. However, in June 2021 we changed our mind, when we understood the country’s economic shift towards the concept of “shared prosperity.” It suddenly became clear that Chinese firms would not be like American platforms. Because the Chinese Government, for reasons of domestic social and economic policy, does not want that. He does not want Alibaba, Baidu or Tencent to become powerful companies like Google, Amazon or Microsoft. So we started to be pessimistic about China. The market is cheap there, but for a reason: right now I don’t know if Alibaba’s cash flow belongs to Alibaba or the Government, I don’t know if I understand.
What other implications does this downturn in China have for the market?
That there is not going to be a bubble in the raw materials sector. When the first sector of the Chinese economy, real estate, goes from 25% of GDP to 10%-15%, this is a terrible wind in the face for raw materials. If we add to this the declining demographics… If you look at the growing middle class in Indonesia, Nigeria or India, it will not be able to compensate for the decline in Chinese demand. Oil supply is sufficient, maybe there could be some tension in copper. But globally there is no deficit. And this is very important for the allocation of resources in the capital market because one of two things always happens: either there is a bull market in commodities or there is one in microprocessors. There cannot be both at the same time.
The word ‘recession’ does not enter into its possibilities. And there is war in Ukraine and the Middle East.
It depends on the shock, but you can always reverse it. There are situations that for an investor are comparable to an open bar. I bought a week after the 9/11 attacks at a good price and sold again two months later. I did the same with Brexit. We entered the market at the end of June and left at the end of July. I could even say that the 2008 crisis was one of the best moments of my career, perhaps the easiest. Every time there was an intervention, like those that took place to save Bernstein or Freddy Mae, there was an uptick. When you identify a systemic problem, you buy until the authorities decide to wake up, like when the Lehman Brothers case occurred weeks later. But hey, in this case, recession is not part of our base case.
Because?
The fundamentals of the economy are very solid. In a recession there is usually loss of income and wealth. But in this case, after the support policies during the pandemic, despite the rate hike, the wealth of American households is stronger than ever. In net debt, they have a fortune that has gone from 71 billion in 2007 to 151 billion in 2023. And the large companies in the SP500 mostly have fixed-rate debt. I understand Jerome Powell: it’s like he wants to stop a bus that keeps moving.
In your opinion, can the electoral race in the United States influence monetary policy?
I believe that in this context of bonanza, Powell has no urgency to lower rates, because the economy is still strong. The only thing that could happen is that he will be forced to anticipate the cut because he will not want it to take place too close to the election date. From there, my prediction is that the US stock market will rebound again, regardless of the president elected.
And how do you see Europe?
The ECB can lower rates even before the US because the situation is not good and it is possible that inflation will reach 2% sooner than we think. For those who manage investments, being on Wall Street is like being at Disneyland, a party. Instead, Europe is going to become an open-air museum, with a Japanized economy and an aging population. The economic gap with the US, in terms of per capita income, has skyrocketed since 2008. In North America, income has almost doubled, while that of Europeans has barely changed. It’s something dramatic, it’s scary. I don’t know if the Europeans are realizing it.
