THE FEDERAL RESERVE (FED)

We reported on the Fed’s lack of ambition in loosening monetary policy earlier in August. It appeared to all market commentators that there would be an emergency rate cut following a period of extreme global equity market volatility. Jerome Powell, however, stood his ground as he knows there is a lot at stake for both the US (and global) economy and for him.

Cutting rates when the US economy is reasonably robust, but inflation has not comprehensively been brought under control, could be the start of an economic catastrophe for the US and the nadir of Mr Powell’s career. To cut and ‘re-raise’ interest rates would signpost an inability to read, interpret and predict what happens next. That is not a reputation any Chairman of the Fed wants.

Mr Powell is unlikely to survive a Trump presidency and potentially could be usurped by a Harris presidency. His stoicism does have to be admired given the situation he was facing a few weeks ago.

We fully expect for there to be a US rate cut on 17th September. Will it be 25bps or 50bps (or more)? In recent years, certainly within the post-financial crisis and Covid-19 years, markets have been allowed to dictate monetary policy with ‘taper-tantrums’ (i.e. equity markets falling sharply when they were not presented with their most favourable outcome). This was based on the proposed phenomena of reductions in stimulus (2013 Euro crisis) and proposed increases from near-zero interest rates throughout the remainder of the 2010s.

However, times have changed, and now markets are more fixated on correctly gauging and timing interest rate cuts from 17-year highs. Mr Powell has his work cut out…at least until November’s election is concluded.

The Bank of England’s (UK) interest rate review will happen almost immediately after the Fed meeting on 19th September.

THE TECHNOLOGY PHENOMENON

Nvidia has come from being a second tier chip-maker fewer than three years ago to being its own ecosystem and (some have argued) asset class. What cannot be contested though is the company’s ability to influence the sentiment – and direction – of the US market. Although Apple and Microsoft remain the two largest companies by market capitalisation, some of the younger ‘chancer’ stocks have become dictators of sentiment. Tesla was moving the market only three years ago with wild swings in value which drove the market according to investors’ interpretation of its fortunes and growth prospects. Today, without question, Nvidia has taken its mantle.

When we read, yesterday morning, that analysts’ estimates of Nvidia’s results would impact the market capitalisation of the company by +/- $300 billion, it prompted us to look at what those valuations mean to UK investors: it is greater than the aggregated value of BP plc and Shell plc. And, more staggeringly, a similar amount to the smallest 45 companies in the FTSE100. That is not the market capitalisation of Nvidia, but the variance the results are likely to inflict on investors in the stock (Nvidia’s stock is currently valued at more than $3 trillion (or about the same as the annual UK GDP figure)!

The reason for writing so much about one stock is that it shows the power of investing over the longer-term in asset classes which may seem speculative or over-valued to both professional and lay investors. Few, if any, of the City’s or Wall Street’s investment houses had placed large bets in Nvidia until about 18 months ago. The share price had already appreciated by many tens of thousands of per cent between its incorporation and this point. It is worth stating that Warren Buffet’s Berkshire Hathaway’s largest holding is Apple, but that is a holding he has only held since 2016 (and has continued to increase the proportion to a staggering 28%, or $90 billion). According to today’s press, Apple has increased its orders for iPhone components by 10% on last year – this is predominantly a result of the company’s tie-up with Chat GPT and the human race’s inability to write its own emails (this piece is all our own work by the way).

Our overriding opinion is that technology appears to be a secular trend which will only continue to further pervade our way of life. During some periods of market volatility, technology company earnings can seem – to some degree – ephemeral, however some of these companies will become behemoths which, as history has demonstrated, can become larger than entire European indices. In time, with a more progressive fiscal backdrop, it could happen in Europe too.

SUMMARY

We will write to you again immediately after the Bank of England’s interest rate decision on 19th September with our interpretation and with any changes which may be required.

We appreciate it is an uncertain world. This applies to the UK political and fiscal backdrop too. The rumours of a UK wealth tax are not entirely new or unexpected, so we will remain circumspect about any speculation until we have solid guidance from our new Government following October’s Autumn Statement.

We are privileged to look after you. Our focus is on your continued prosperity.

Thank you for your continued trust and confidence.