The key question is no longer simply whether AI will generate economic growth. Investors are increasingly asking whether the huge amounts being committed to data centres, semiconductors, cloud infrastructure and power capacity will generate an adequate return on capital. Concerns about excessive spending and capital misallocation put pressure on technology companies and contributed to volatility in the United States and technology-led Asian markets.
In the United States, the S&P 500 declined by approximately 0.9% in October. Technology shares were particularly sensitive to scrutiny of AI investment, financing requirements and pressure on free cash flow. This market rotation did not represent a rejection of AI's long-term potential, but rather a reassessment of valuations, funding needs and the time required for companies to generate returns on their investments.
This distinction is important. AI investment may remain a major structural growth theme, but strong demand for computing capacity does not automatically translate into attractive shareholder returns at every valuation.
In Europe, France's financial problems have so far failed to trigger contagion in other countries, as many have put their house in order since the last sovereign debt crisis. However, the social crisis has found echoes elsewhere in Europe, adding to consumer concerns.
With France's 10-year bond yield at 5% and the French stock market underperforming, the euro has also come under pressure, falling to just below 1.12 USD.
Emerging Markets Experience Significant Volatility
Emerging markets have also experienced substantial movements.
Brazil has been a standout performer, gaining 13% following the results of the first round of the presidential election, unexpectedly won by Bolsonaro. For investors, Lula was an acceptable choice as he was expected to ensure policy continuity. However, Bolsonaro is still perceived as the more market-friendly option, and investors have been celebrating the likely return to power of the Bolsonaro family.
Elsewhere in emerging markets, MSCI has triggered a difficult period for both the Turkish and Indonesian stock markets, which fell by 17%. Changes to indices on the Istanbul stock market have been frozen, prompting investors to head for the exit. Meanwhile, the dispute between the index provider and Indonesia has escalated further. Indonesia has been threatened not only with a downgrade to Frontier Market status, as previously indicated, but also with standalone market status, as MSCI considered that insufficient progress had been made in addressing the issues identified.
This has led to the biggest fall in Indonesian stocks in decades. The decisions came as a surprise, as MSCI was expected to announce its conclusions on both countries on November 11. As a result, many market participants were caught off guard, with several questioning the decision.
Defensive Stocks and Bond Markets Attract Investor Attention
As investors look for alternatives to technology investments, Swiss stocks have had a strong month. Most defensive markets have performed well, and the more traditional London stock market was no exception.
At a time of heightened tensions in bond markets, Norwegian bonds have been in high demand. While current euro-denominated yields can be considered attractive, it is probably best to stick to shorter maturities at this stage.
Overall, investors should prepare for further financial market volatility, maintain exposure to long-term growth opportunities and ensure adequate liquidity to navigate potential market turbulence.