“We were very optimistic about the markets at the start of the year.” “We need to rewrite the script now,” says Laurent Denize, CIO at ODDO BHF Asset Management.
The AI market is not the only sector offering investment opportunities. The healthcare sector is also undergoing a revolution. Besides, making a bit of cash isn’t a bad idea – it’s a way of reducing exposure to semiconductors and hardware without pulling out of the market altogether. In a nutshell, you should remain invested but reduce your exposure to shares, and stay alert whilst targeting opportunities and looking for lower prices. “Equity is still the place to be.”
The market also needs to take greater account of the ‘interest rate’ factor. Bruno Cavalier, Chief Economist at ODDO BHF, believes that perhaps the Fed should not have cut rates so much at the end of 2025. The US central bank appears to be taking a more corrective approach with its recent interest rate rise. Reassuring everyone of its independence, it reached its decision unanimously despite pressure from Donald Trump, who would prefer to see interest rates fall.
In Europe, whilst inflation is lower and less widespread following two upward movements, it is likely that we are approaching the equilibrium level for interest rates.
However, the rise in long-term interest rates began as early as 2022 (following the Covid period), with deficits that continued to widen throughout and after the Covid period. Long-term interest rates have now reached a level that is in line with the fundamentals. With the yield on the French 10-year government bond (the OAT) approaching levels not seen since 2008.
Unfortunately, government debt is being rolled over at higher interest rates, resulting in a rapidly rising interest burden, particularly in France. And with the sword of Damocles in the form of foreign investors’ appetite…
Europe…
But there are also positive signs in Europe, with the German economy showing signs of recovery. Whilst Spain continues, tirelessly, to defy the statistics and surprise us quarter after quarter with a growth rate hovering around 3 per cent…
“We were very optimistic about the markets at the start of the year.” “Today we need to rewrite the script,” amid uncertainty fuelled by three factors: the Strait of Hormuz, ‘tech’ and inflation.
Whilst things are going well for shares, with a string of excellent results, there is a downside when it comes to hyperscalers. In fact, 60 per cent of the results are inflated by the accounting revaluation of their various shareholdings (OpenAI, etc.). “At this stage, we are not in a valuation bubble but in a spending bubble,” explains Laurent Denize.
Over-optimism?
Between 2026 and 2030, the market anticipates a 45 per cent annual increase in profits… This is optimistic – too optimistic – given that cash flow is likely to be at risk given the list of announced investments, and the obvious risk that this funding will have to be raised through the debt market. The announced developments cannot be extrapolated from the current rate of growth (e.g. a fourfold increase in the number of data centres in the United States over three years). The market will eventually take this into account and demand a higher risk premium for these shares. Caution is advised regarding valuations.
Indeed, the market tends to view things through rose-tinted glasses, without yet paying too much attention to an increasingly murky off-balance-sheet situation. “The ratio stands at 1 to 5 for off-balance-sheet commitments, and this will ultimately affect free cash flow,” explains Laurent Denize. This is because, in order to finance the large-scale roll-out of artificial intelligence infrastructure without placing an excessive burden on their official debt ratios, these giants are increasingly turning to such arrangements.
Reducing exposure to ‘semiconductor’ and ‘hardware’ shares is a prudent decision to take in investment portfolios. And watch out for the sector’s smallest players, who are more vulnerable.
Conversely, software companies whose share prices plummeted at the start of the year – on the assumption that they would become obsolete as AI expands – may offer value. Indeed, the announcement that Anthropic’s tools are to be integrated into Salesforce to boost productivity illustrates the potential synergies.
Portfolios need to be diversified a little more. The healthcare sector is one option. We may be approaching a ‘ChatGPT moment’, as illustrated by Moderna and Merck’s collaboration on the production of personalised vaccines. A revolution in oncology, a huge market…
Beyond the issue of AI, there is the question of the ever-increasing number of bottlenecks resulting from unchecked electricity consumption. The time taken to connect a power station to the distribution networks is tending to increase; it can take anywhere from three to seven years. The investment requirements in this sector are enormous, and are giving rise to new ideas such as SpaceX’s space projects.
On the European equity market, there have rarely been so many upward revisions to earnings forecasts over the past five years. Whilst share prices may seem high, when compared with companies’ cash flow, they are not. Similarly, the return on capital remains high in the banking sector, which continues to be an attractive investment.
It makes sense to maintain exposure to the US and Europe – with a focus on Germany – whilst capitalising on market pullbacks. Whilst not losing interest in the Korean market due to its low valuation, and whilst remaining an active investor in the Chinese market.
At last, the analysts at ODDO BHF are gradually returning to gold. However, bear in mind the correlation between interest rates and the price of gold. Aluminium and copper, on the other hand, with the potential for future imbalances between supply and demand, may also perform well.
