Susannah Streeter, Chief Investment Strategist, Wealth Club
”Worries about the cost of borrowing have sparked a fresh wobble of confidence, with tech companies sliding as investors brace for an era of higher interest rates amid growing competition in the sector. The tech-light nature of the Footsie is offering insulation from the sell-off, and the sun looks set to shine a little more brightly on retailers, given data out showing shoppers have been showing remarkable resilience amid high cost-pressures.
The sell-off drama has been concentrated in Asia, with South Korea’s Kospi plunging by around 6% and Japan’s Nikkei falling by more than 2% as semiconductor stocks sold off. The tech-heavy Nasdaq in the US also looks set for another slide as worries creep in about just how much tougher the landscape will be ahead, just as the Fed weighs whether further rate rises will be needed in the months to come.
First-mover advantages look set to be eroded by the new kids on the chip block. Advances by China’s CXMT have sent a shiver of apprehension through the market, after the company reported “key progress” on a new cell architecture designed to bolster memory density, with plans for a product rollout. This is a highly competitive field, with rivals Samsung Electronics and SK Hynix also hard at work at this edge of innovation. It’s raised big questions yet again about valuations based on bumper earnings projections and the scarcity of products, given the progress of rivals.
With further interest rate rises a possibility, there are also fresh niggles of worry about the huge costs of staying ahead. Tech giants are borrowing billions to fund research and develop new models, and retail investors are also leveraging their bets through loans, which have been helping to support valuations to some extent. A deeper crisis of confidence could set off a wave of selling, which could shake the industry ahead.
Those with the deepest pockets and the broadest networks are likely to be the most resilient in a shake-out. But even the megalith of Meta has been taking on substantial debt to fund its AI build-out, with spending putting pressure on the cash it has left over after investment. It claims its massive spending programme has put it at the frontier of AI, with its new Muse Wonder models taking on OpenAI and Anthropic. But despite enjoying a boost on Monday as new versions were released, unease is starting to spread again about whether this huge spending programme will reap big enough rewards. It has a huge ready network of potential global customers through its 3.6 billion daily active people across its family of apps. The question is how many will be prepared to pay for a bot for daily chores, and Meta may not have the edge when it comes to lucrative enterprise clients.
Energy prices have dipped a little, down from a fresh spike on Monday, but remain scorchingly high. Brent crude is still trading above $105 a barrel as the highly complex situation in the Middle East looks increasingly difficult to solve, with Saudi Arabia under attack and projectiles continuing to hit tankers using the Strait of Hormuz, with further incidents reported in the last 24 hours. While some US-bound Russian diesel supplies appear to have been unlocked, the relief could be short-lived, with US lawmakers raising concerns that the deal could be contrary to law, and with Ukraine’s Zelensky vowing to continue strikes on Russia’s refineries. The latest US inflation data due out tomorrow will be a key test of how far the surge in energy prices is feeding through into the cost of living, and just how much pressure the Fed may feel to raise interest rates to keep a lid on the price spiral.
Shoppers in the UK appear to have thrown more caution to the wind despite the prospect of rising bills, with retail sales rising in a more robust fashion than expected in September. The snapshot from the British Retail Consortium showed like-for-like sales rose 1%, beating forecasts, with health and beauty sales particularly strong. Barclays data backs up the trend, with the amount shelled out for non-essential purchases rising 1.8%, even in a month when there was a 17.3% jump in fuel spending due to higher prices at the pumps.
It appears that a Burnham bounce may be playing out on the high street and in shopping centres, with consumers seeming a little bit more confident in their financial situation with a new leader in charge. Household financial confidence rose to a seven-month high of 67%. Nevertheless, all the speculation about the Budget is still taking a toll, with around two-thirds also concerned about what impact it may have on their finances. With shoppers staying resilient so far, the Chancellor will be under more pressure not to rock the boat with big tax changes.”
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