From a very short-term perspective, conflicts such as the one in the Middle East can certainly trigger corrections. But from a longer-term perspective, what we are seeing is a full-fledged technological revolution. We risk becoming overly cautious.
That was what MAPFRE Investment Manager and Fund Selector Javier de Berenguer said, when he commented on whether the market is experiencing a period of euphoria.
“We have seen the market consistently lag behind Nvidia, a company whose earnings have, quarter after quarter, outstripped its prior market valuation,” Mr de Berenguer commented.
“We risk seeing the same thing happen with other companies if we view the market through a cyclical lens or rely on sentiment indicators that may work in normal economic contexts, but can leave us behind in the midst of a technological revolution.”
At present, he pointed out that the market “is not pricing in a scenario in which the conflict involving Iran and the Strait of Hormuz drags on much longer”.
“The risk investors are factoring in is being left out of AI, and that is the one they are prioritising. If this extends beyond July or August, we would no longer be looking at oil-price risk, but at scarcity risk, which would trigger an economic recession. It will all depend on how long the conflict lasts,” Mr de Berenguer warned.
Touching on inflation next, he noted that the US is expected to see some rebound, “although it is not expected to be especially large”.
“But because the U.S. is the country with the greatest exposure to AI and its productivity gains, the impact on growth is not expected to be as significant,” said Mr de Berenguer.
“Any potential rate hike will depend on what happens in Hormuz and how long the conflict lasts. There could be a rate hike at the end of the year, not so much because the Fed believes it would be effective, but as a way to shore up its credibility.”
Additionally, he highlighted that the ECB’s credibility is also at stake in Europe, as the Eurozone is more exposed to the impact of oil prices, meaning rate hikes would come sooner.
As such, Mr de Berenguer commented that they would not bring inflation down either, but the measure would serve other purposes: shoring up credibility and supporting the euro.
He said, “As a general recommendation, we warn against overly cautious positioning. We need to be invested in equities over the medium and long term. In the short term, much depends on Hormuz.”