Asian stocks hit two-year high on AI-pumped mania that looks, acts and talks a lot like the dot.com craze of the late 1990s
TOKYO – Surging stocks aren’t always good news, especially when the current artificial intelligence (AI)-driven boom underway gives Asia yet another big reason to fret.
And to batten down the hatches. Between China’s slowdown, the US Federal Reserve delaying easing moves and geopolitical uncertainties at every turn, Asia is navigating an increasingly precarious 2024.
Asian equities rising to two-year highs on little more than AI-inspired mania suggests fresh stock bubbles are being inflated by the day. Bubbles that, should they implode, could slam economies throughout the region.
What’s more, Tony Wang, manager of the US$9 billion T Rowe Price Science & Technology Fund, thinks the AI rally is only just getting started.
Multiples “are very reasonable right now,” Wang tells Bloomberg. “We will get a downturn eventually, but I think it’s really hard to call the top here and I think it still feels a little early.”
Yet that downturn could come at any moment and set off a chain reaction at a time of maximum vulnerability across the region.
In China, for example, Xi Jinping’s team only recently managed to put a floor under a plunging stock market. The $7 trillion rout between the 2021 peak and January this year has already done incalculable damage to business and household confidence and wealth.
At the same time, China’s property crisis remains a clear and present danger. Deflationary pressures are colliding with record youth unemployment and deteriorating financial conditions among local governments in Asia’s biggest economy.
Japan, meanwhile, just barely avoided recession in the second half of 2023. The economy contracted 3.3% in the July-September quarter year on year and eked out just 0.4% in the last three months of the year. In January, household spending plunged 6.3% from a year earlier, the sharpest drop in 35 months.
All this at a moment when the Bank of Japan is attempting its first tightening cycle since 2007. And as Prime Minister Fumio Kishida’s approval rating slips to an abysmal 20%, he has little political capital to revive the reform process.
On top of events in China and Japan, Southeast Asia faces the prospect of “higher for longer” US bond yields. The region entered the year convinced Fed Chairman Jerome Powell’s team would slash interest rates several times in 2024.
Stubbornly high inflation is dashing those hopes. The specter of geopolitical threats — from Ukraine to the Red Sea to Sino-US tensions — boosting oil and food prices looms darkly over developing Asia’s year.
This backdrop would be challenging enough without equity markets going gangbusters for reasons few comprehend — or connect to Asia’s prospects in even tangential ways.
With the Dow Jones Industrial Average on the verge of 40,000 and the Nikkei 225 Stock Average moving above that level – a Japanese record – frothiness abounds.
Take what happened with chip maker Broadcom Inc this week. Its shares skyrocketed just because the company held an event highlighting AI investment opportunities. That turned analysts like Matthew Ramsay at TD Cowen bullish on Broadcom. His note to clients was headlined: “Better Late Than Never?”
It’s hard not to sense late 1990s tech stock mania vibes. Back then, all Walmart or Macy’s department stores needed to do to boost share prices was add “.com” to the end of their names.
Nor is it hard to sense echoes of the meme stock frenzy that propelled shares of GameStop, Bath & Beyond and other unloved companies into the stratosphere.
As this latest bout of potential “irrational exuberance” intoxicates world markets, it’s worth reflecting on the origin of that infamous phrase. In December 1996, then Fed Chairman Alan Greenspan tiptoed up to warning of a bubble in US tech shares.
In the middle of a rather dry financial speech, Greenspan asked: “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”
Specifically, Greenspan was referring to Japan’s early 1990s stock crash. But US traders didn’t miss the fact that the Fed was sending a rhetorical torpedo across Wall Street’s bow.
Years later, Greenspan wrote “I was choosing my words very carefully. I carefully hedged what I had to say in my usual Fedspeak.”
Perhaps too carefully, as economist Chris Turner at ING Bank points out. In the three years after Greenspan’s warning, the S&P 500 doubled. The index peaked, Turner notes, amidst the top tick of the dot-com bubble in 2000.
The question now is what Powell’s team does. As Greenspan said back in 1996: “We should not underestimate or become complacent about the complexity of the interactions of asset markets and the economy. Thus, evaluating shifts in balance sheets generally, and in asset prices particularly, must be an integral part of the development of monetary policy.”
Powell’s choices aren’t great. Count stock guru Ed Yardeni of Yardeni Research is among those who believe Powell’s team may over time throw cold water on an AI rally driven more by “fear of missing out” than financial fundamentals. Fear in markets could spread quickly, he notes, in the event of a “more hawkish” crouch by the Fed.
Yet like the meme stocks rallies or Bitcoin hitting new highs, the Fed is something of an analog power in a digital world in the throes of speculative frenzies moving at warp speed.
As frenzies around chipmaker Nvidia Corp’s shares and the disruptive power of ChatGPT upend trading strategies, Asian markets are on the front lines.
A keynote speech this week by Nvidia CEO Jensen Huang at the company’s GPU Technology Conference (GTC) conference seemed to garner more attention than the BOJ lifting Japanese rates for the first time since 2007.
“Move over Taylor Swift, you’re not the only one that can sell out a stadium as Jensen presented his GTC keynote to a packed crowd” in San Jose, California, write analysts at Bernstein in a note to clients. Strategist Amy Wu Silverman at RBC Capital Markets speaks for many when she calls Nvidia the “Paris Hilton” of stocks.
All this raises questions about whether central banks have lost potency as markets operate in orbits outside of their reach. For now, though, the most powerful central bank is taking a wait-and-see approach to domestic trends.
“Overall, the [Fed] has stuck to its view that the underlying inflation picture is improving, notwithstanding the disappointing numbers in the past two months,” says economist Ian Shepherdson at Pantheon Macroeconomics. “In other words, they view the most recent numbers as a temporary interruption rather than a change in the trend.”
Mohamed El-Erian, Allianz’s chief economic advisor, agrees that the Fed is telegraphing a wait-and-see approach. Powell’s team, El-Erian says, is “indicating a willingness to tolerate higher inflation for longer.”
The same with the timeline for carrying out so-called quantitative tightening. “The first aspect of patience aligns with the goal of maintaining economic well-being,” he says, “while the second reflects a desire to prevent liquidity-related disruptions in market functioning.”
The BOJ’s options are even more up in the air. This week, Governor Kazuo Ueda took the smallest steps possible toward ending quantitative easing. On March 19, Tokyo ended the world’s last negative interest rate regime and scrapped yield curve control policies. Its new range for policy rates is between 0% and 0.1%, moving away from the previous -0.1% target.
So far, though, the BOJ has been very careful not to hint at when a significant rate move might occur. “The BOJ’s reticence to provide forward guidance is understandable but will become increasingly important for shaping the structure of the yield curve,” says Idanna Appio, a portfolio manager at First Eagle Investments:
In February, Japanese inflation rose at the quickest pace in four months. Consumer prices, excluding fresh food, jumped 2.8% year on year. On the surface, these data would seem to validate views that the BOJ will follow its first rate increase in 17 years with another later this year.
At the same time, economist Takeshi Yamaguchi at Morgan Stanley MUFG finds great significance in indications that “a good number” of respondents to business surveys worry about the “impact of slowing Chinese growth” on Japan’s outlook.
Yet the yen’s 1.8% drop since the BOJ’s supposed tightening move suggests traders are unconvinced Ueda will be moving again anytime soon. As strategist Noriatsu Tanji at Mizuho Securities puts it, global markets are “half in doubt” about fresh tightening moves.
In the interim, analysts like Simon Harvey of Monex Europe Ltd think Team Ueda has the monetary “firepower” to break the yen’s fall toward the lowest levels since 1990.
“With government bond yields now allowed to flexibly adjust higher, as long as it is in a moderate manner, verbal intervention by policymakers will now be more effective as they can effectively guide expectations of future policy in a hawkish direction to support the yen,” Harvey notes.
On March 19, Finance Minister Shunichi Suzuki said his team is paying close attention to yen moves. Yet with AI-driven manias sending stocks into bubble territory, Japanese officials are no more in control of financial conditions than anyone else in Asia.
