Take a Breadth

00:00:00: Hi everyone and welcome to Swisscout's daily market talk.

00:00:04: It is Wednesday, May.

00:00:06: the sun is shining The birds are singing Geopolitical risks are being ignored.

00:00:11: despite strikes in the Middle East Semi-conductors continue pushing higher.

00:00:16: global yields come down even during a session where oil prices climb as much at four percent.

00:00:23: All these are suggesting that investors either getting used to the diplomatic volatility in the Middle East and or pricing out the Iranian war on slightest glimpse of hope.

00:00:34: The problem with this is even technology stocks might get a reality check if the geopolitical and macroeconomic backdrop don't improve in coming weeks, so we will talk about all those and more.

00:00:46: but before Please keep in mind that opinions are my own and this is not financial advice.

00:01:02: So it feels like we are reaching the point that geopolitical tensions do no longer bother investors, at least as much as they did in the previous weeks of the Iranian war.

00:01:12: Iran's explicit dissatisfaction regarding the progress in talks about its nuclear program or even US strikes in the Middle East didn't reverse hopes that The War In Iran will end soon.

00:01:23: and despite a nearly four percent jump in crude oil prices yesterday global yields ease and equities rally to fresh all-time high levels.

00:01:34: The S&P five hundred was sure powered by technology stocks, particularly chip stocks because their micron for example jumped twenty percent yesterday.

00:01:44: yes it jump twenty percent yesterday and more than twelve hundred per cent since April.

00:01:51: two thousand and twenty five after analysts at UBS more than tripled.

00:01:56: Their price target on Micron from five hundred thirty-five dollars a share to sixteen hundred twenty five dollars a year.

00:02:05: arguing that AI has structurally changed the memory of business, and that Micron is no longer just a cyclical dram company UBS said that AR drew in demand for HBM memory, long-term supply agreements and expected memory chip shortages could actually keep pricing and margins elevated for years.

00:02:25: And they probably will!

00:02:27: But the membership sector usually swings between boom & bust cycles.

00:02:31: There are periods of supply shortages pushing prices and margins higher.

00:02:35: during these period shipmakers aggressively expand capacity and supply eventually catches up leading to But cycles where excess capacity weighs on cheap prices and profits.

00:02:47: Right now, obviously we are in the middle of a boom cycle And there is little doubt that exploding AI demand will extend the boom phase off the cycle... ...and maybe smooth out those cycles as well but it won't make them disappear completely.

00:03:04: Microns on CEOs said that the shortage could last until two thousand twenty-six and two thousand Twenty seven.

00:03:10: And what happens after?

00:03:11: How many things can happen really?

00:03:13: among them a I demand.

00:03:15: growth, for example Could slow down supply chain disruptions could limit production capacity.

00:03:20: constraints could limits revenues are all more reasonably new technologies could reduce demand For today's memory chips.

00:03:27: The chips themselves could evolve.

00:03:29: new chip architectures optical computing better compression techniques efficient inference models, or entirely different memory technologies could eventually reduce dependence on today's HBM heavy setups.

00:03:43: And as possibly smaller and more efficient AI models can require far less memory per computation unit than todays giant models!

00:03:53: Together these could weaken the extraordinary pricing power that memory chip makers enjoy now.

00:03:59: This doesn't mean that memory chip makers will not enjoy an extended period of extraordinary profits, but the latter has been wildly priced in right now I guess while valuing these companies as if today's shortages and margins would last forever carries obvious risks.

00:04:15: Last Korean Cosby Index is up by another three point seventy percent this morning to a fresh all-time high level Of course driven higher.

00:04:25: buy Samsung and SK hynix Two membership makers there, while cost piece equal weighted index is down by two percent at the time I'm talking here.

00:04:56: and the weakening economic outlook.

00:04:59: The answer is, we will see!

00:05:01: There's a chance that good news from Middle East helps lifting the lagging sectors balancing out the rally and making it look a bit healthier, more sustainable.

00:05:13: But in the meantime we continue to watch the economic data to observe the extent of impact on economy activity and price pressures everywhere in the world.

00:05:23: Last week for example PMI numbers hinted at notably slowing activity across major economies combined with rising prices.

00:05:31: And this morning Australian inflation figures suggested that price pressure actually slowed more than expected by analysts compared to April figures that actually reflected the initial jump in energy prices due mean CPI rose three point four percent year on year in Australia to the highest level since September.

00:05:53: two thousand twenty-four.

00:05:55: And around the corner, The Reserve Bank of New Zealand kept its policy rate unchanged today for third meeting as expected but warned that OCR is likely rise sooner rather than later and by more then previously expect it in February with speed of future hikes depending on the balance between persistent price pressures and weaker economic activity.

00:06:20: The key dollar bounced off its two hundred-day moving average from the Reserve Bank of New Zealand today.

00:06:27: Elsewhere, the U.S.

00:06:28: dollar index remained little changed near a fifty day moving average and futures are quite flat this morning just before European opening.

00:06:36: All this being said on the earnings front, well.

00:06:38: The US earning season is gently coming toward an end with quite a spectacular twenty eight point four percent earnings growth rate for their S&P.

00:06:48: five hundred companies printed for the first quarter of this year and that's the highest since the fourth quarter of two thousand twenty one when the earnings growth was around thirty-two percent.

00:06:58: but if you strip out the big tag while earnings still looks strong far less impressive.

00:07:04: In numbers, the Magnificent Seven delivered roughly sixty percent and plus earnings growth in the first quarter while the remaining SMP four hundred ninety-three deliver around seventeen to eighteen percent earnings growth.

00:07:16: The broader market still grew at a healthy pace And that despite an unideal geopolitical backdrop with the beginning of the area new war and already rising energy prices by the end Of the reporting period suggesting that one month disruption was actually manageable for many, many companies.

00:07:36: But they also started warning that it prolongs period of energy shock or sustained geopolitical instability in the Middle East region could be much harder to absorb especially with valuations already stretched.

00:07:51: and I'm really looking at the technology stocks here now.

00:07:54: obviously as everybody noticed tech stocks master haven flows has the Iran war encourage investors pull their money back from sectors that would be directly and heavily hit by the rising energy costs, supply chain disruptions.

00:08:09: And geopolitical uncertainty in the Middle East region.

00:08:12: but The thing is even the technology sector Is not entirely and forever shielded From the consequences of a prolonged conflict In the middle east?

00:08:30: that is essential for manufacturing advanced microconductors, cooling MRI machines supporting fiber optic infrastructure and operating aerospace systems.

00:08:40: And guess what?

00:08:41: Global helium supply is highly concentrated in the Middle East with Qatar accounting for a significant share of exports as this gas-halium is produced.

00:08:54: Naturally, a prolonged period of disruption to your production or transport rose in the Middle East could tighten supplies and will eventually push prices sharply higher.

00:09:04: And unlike oil Helium has very limited substitutes In many high technology processes meaning that shortages here Could quietly become A bottleneck for SMI conductor production An even AI infrastructure expansion.

00:09:19: Ensuring what I'm trying To say is That it Will still be better Even For Technology stuff if the war in the Middle East ended, and it ended quite fast.

00:09:28: So this is all for today!

00:09:29: I'm Ipeko Skardishkaya And thank you for joining me.

00:09:32: Thank you for your beautiful and supportive comments.

00:09:36: I hope that episode of Market Talk has been helpful.

00:09:39: It's been insightful to you.

00:09:42: Please do not hesitate to leave your comments Your reactions and questions below.

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00:10:07: So I will meet again tomorrow and until then good day

00:10:13: trading.

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