Days after the President of the European Central Bank (ECB), Christine Lagarde, took the stage to act out a script already agreed upon with the markets, Allianz Global Investors celebrates downstream apple accounts a meeting with journalists from across Europe just hours before the US and Iran sit down to sign the definitive MoU (memorandum of understanding) that will - this time for sure - end the conflict in the Middle East. It is a moment of transition from the old world of recent months (high inflation and rising interest rates to combat it) to the new context of the second half of the year where AI, which dominates everything, begins to raise concerns among professionals and small investors who have already started selling, and where fund managers and large investment banks are looking for the next catalyst once the reopening of the Strait of Hormuz is taken for granted.
What window is opening now? Four years after the rumor circulating in the boardrooms of major international asset managers is a possible agreement between Europe, the US, and Russia to end the war in Ukraine. Two months are given to offer something that convinces Donald Trump to resolve the conflict, which would undoubtedly help lower fuel prices and also ease the discomfort of Americans who have seen the cost of filling their car tanks skyrocket this year. All in the interest of improving the atmosphere for the midterm elections in the US to be held in November. "I don't know if it will happen, but speculation alone is causing the markets to start looking" and preparing for that new scenario, says Gregor Hirt, the global head of investments in Multi-Assets and managing director of Allianz Global Investors. Is it the next chapter?, we ask. "It's the next story (...) It doesn't have to happen, but [just the idea] is a positive support" for the stock markets. "And if we talk about the real economy, a lower oil price, just by looking at the cost of gasoline for the car, psychologically, is very important for consumers, for vacations, for the estimates that companies handle as well... Perhaps the ECB will backtrack, with greater visibility, and perhaps decide that we do not need another interest rate hike."
Before the end of the war with Iran was known, the central bank had downgraded its forecast for Eurozone inflation, growth, and oil and gas prices for two consecutive quarters. Today, the narrative has changed radically, and when a new rate hike was expected at the July meeting, some now believe that would be going too far, now that everything is calming down again.
The German asset manager now maintains a more positive tone on Europe, the region that has suffered the most from the war, high oil prices, and a lack of specialized AI companies. However, "Germany is key" to keeping spirits high after the promise of public spending exceeding half a trillion euros in the coming years, which will be allocated to infrastructure or defense. This investment "will spread throughout Europe, and the longer we wait, the longer it will take to have an impact," says the manager.
Hirt confesses (with laughter) that he started studying central bank monetary policies 30 years ago when it wasn't as "sexy" as it is now. And it's true that ten years of wandering in the desert have led to a context where central banks are once again taking the lead. Beyond the ECB, the arrival of Kevin Warsh at the helm of the US Federal Reserve has raised many questions after the pressures faced by his predecessor in the role, Jerome Powell. The executive from Allianz Global Investors dismisses the idea that Warsh is by definition "a Trumpist." He has never believed that. He does think, however, that he is to the liking of the US president for the simple reason that he wants a less interventionist Fed, one that allows things to happen, and this is music to the ears of the president amidst a wave of banking deregulation in the country.
And once again, the big topic that everyone wants to talk about, which cuts across all sectors, is artificial intelligence. The conversation with Gregor Hirt takes place a few days before (three sessions, to be precise) the South Korean stock market plummeted by 10% and SpaceX dropped another 16%, in the second-largest single-day correction in history, with $400 billion. The largest, with over $590 billion, was led by Nvidia, the world's largest listed company. The asset manager argues that, immersed in the AI cycle, investment waves are trickling down the value chain, and now the step where everyone wants to be positioned is in the energy challenge: how much will be needed, how renewable systems will be combined to connect them to data centers, and many other unresolved issues. "We are not in 2020 or 2021. We have already begun to see major investments (capex) by companies generating immense revenues, and now we know there will be winners and losers," he acknowledges. And it is these losses or disappointments of some AI giants that could "destabilize" small investors because it should be noted that "so far everyone has won" with AI. The retail shareholder "has a significant stake in the market (...) and tends to panic slightly earlier than the institutional investor." Elon Musk himself reserved 30% of SpaceX's IPO for retail investors, around $22.5 billion globally. "Well, now you will have to be much more selective" when investing.
For Hirt, South Korea, Taiwan, and other markets in the region with a strong presence of semiconductor manufacturers are "bottlenecks" globally for AI, although he understands that "whatever happens, there will be demand" for these companies given an excessive supply. Is there a bubble? The expert talks about valuations that have "begun to anticipate future profits" and, although there is still room ahead, it is starting to become worrisome.
One of the scares from two weeks ago was caused by the US government itself when it prohibited Anthropic from using its systems by anyone who was not American, including its own employees. "It's not unusual," acknowledges Hirt, and in fact, he confesses that government intervention is "one of the reasons they like this company, as it has strategic government backing, which means it is willing to finance them economically, through contracts, and to tolerate oligopolies and monopolies," although it "could become a problem if the government starts blocking its development." At the moment, he doesn't believe so and recalls how 20 years ago the US government proposed banning the shipment of computers to Russia or China.
The part that worries him a little more, says the manager, is the drop in the price of tokensthat people are willing to pay to use AI. It could have various explanations, "one of the simplest being a demand issue." Another is attributed to companies offering these services at very low prices to attract and retain customers. And a third reason could be a readjustment of the services people demand and are willing to pay for; the idea of "not needing super-intelligent things" depending on the workers and this being behind the price adjustment. "A fragmented market, something very common." Regardless, "I'm not worried" about the price adjustment, "I'm worried about how the market will react to it, as it could anticipate lower margins and lower revenues (...) and create a very volatile environment." The magnitude is such that a market scare like the one seen between Monday and Tuesday of this week led the Nasdaq 100 to lose $1.3 trillion in market capitalization, almost the value of the Spanish economy, in 48 hours.