Market News 3 February 2025

Johnny Lee writes:

Last week saw considerable tumult in equity markets, after two announcements introduced major uncertainty for investors.

The first was an announcement from Chinese company Deepseek regarding a development with its “R1” Artificial Intelligence platform.

At the risk of oversimplifying, the thrust of the concern was regarding the efficiency and cost of the language model it had developed, which was reported to have been developed at a cost in the low millions. This compares to the hundreds of billions invested into existing AI infrastructure – and the billions more expected in the years ahead.

The immediate reaction from markets was negative. Nvidia, once the world's most valuable company, saw its share price fall 17%, the equivalent of about a trillion New Zealand dollars. Nvidia designs much of the hardware used in the processing of data for artificial intelligence and has enjoyed a huge increase in demand for its chips since the AI boom began.

Nvidia was not the only company impacted. Data centre owners and even electricity producers lost value on the day. Entire companies had been created to build and supply new electricity into the market to support the anticipated demand from new data centres housing these chips processing data.

Even Infratil saw a modest decline in value. Infratil’s data centre investments have been a major driver of their outperformance for many years now.

Share prices did see a modest bounce the second day. However, concerns remain regarding the valuations of these companies, and whether they have exceeded the realms of sensibility.

The Dow Jones, by contrast, rose on the day and continued to rise the follow days. The Dow Jones has a much smaller weighting towards Nvidia and the technology companies, instead favouring a more diverse spread of sectors, including healthcare and financial services. 

The sudden volatility in the technology sector highlights an important point.

The market currently has a sharply increased sensitivity to disruption, heightened perhaps by the record valuations given to the companies involved and the speed at which these valuations were reached. An announcement from an unknown Chinese technology start-up was enough to send shareholders into a panic, and they have not yet fully recovered.

The valuations seen from the technology sector are based on future earnings, and it is clear there is more disruption to come to this sector. It had been broadly accepted that in order to meet future demand for AI services, the world would need to ramp up the scale of data centres to process this demand. Data centres would need computer chips and electricity, which had led to increased demand in those sectors.

Challenging these assumptions would challenge the valuations seen across the technology sector and introduce further volatility to the market.

The other development came at the end of the week, when the United States confirmed its intentions to apply tariffs against its largest trading partners, including Canada and Mexico.

A tariff is a tax placed on an imported good and is usually applied to protect an industry by making the imported goods more expensive. Local products then become relatively cheaper, which incentivises consumers to buy locally.

Canada responded to the news by placing its own tariffs on certain American imports. Mexico has also indicated it would look to make retaliatory actions against the United States. 

Markets had already closed when many of these developments occurred. Tonight will see the first US share market reaction to the escalations.

The so-called “trade-war” comes at any interesting time for markets, and introduces a new headache for central banks.

The US Federal Reserve met just last week, holding interest rates at their current 4.25% - 4.50% range. This was in line with market expectations and occurred prior to confirmation of the tariffs.

Much of the commentary around the decision was political. It is clear that the fear of global tariffs, and the price increases expected to follow, was front and centre. 

Tariffs tend to be inflationary, particularly when applied to everyday items like lumber and steel.

Fed Chair Jerome Powell made it clear that rate cuts would only be forthcoming if economic data deteriorated. Indeed, there are an increasing number of scenarios now that could feasibly lead to higher inflation, and rate hikes to become necessary. Powell made it clear that a tariff war was one such scenario.

The Fed’s next meeting is in March, and markets are expecting another rate hold.

In New Zealand, the RBNZ’s chief economist Paul Conway gave a very useful speech, highlighting his view on our economy and, importantly, his view on the neutral interest rate.  The neutral rate is the rate that would sustain inflation remaining within the target range. Put another way, the rate that is neither contractionary nor stimulatory.

In brief, Conway believes the neutral rate is between 2.50% and 3.50%. The OCR is currently 4.25% and is expected to be reduced to 3.75% when the Reserve Bank meets on 19 February. From there, Conway comments that the Reserve Bank expects rates to “settle around neutral”. He does comment that a number of risks – particularly geopolitical – are rising.

For investors, the message seems clear: more rate cuts are likely, but we are nearing the end of the cutting cycle. Both here and abroad, expectations are that 2025 should see rates bottom out. 

From there, the RBNZ hopes to have enough flexibility to make more minor adjustments to keep long-term inflation within the target band. 

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Markets closed down in January, with the NZX50 down around 1% for the month.

February is reporting season, with the majority of our listed companies due to publish their financial results. Vulcan Steel will be among the first cabs off the rank, with its results due 11 February. 

While January saw general weakness across the market, some stocks bucked the overall downward trend. 

Heartland Bank was up 7.50% in January, ahead of its 27 February result. EBOS Group is up 7% for the year so far, after a strong rally late in the month. The healthcare company reports on Wednesday 19, with most analysts expecting another decline in revenue after its Chemist Warehouse contract loss.

Spark’s result is due on Friday 21. The company has already indicated its intention to return its dividend back to lower levels, to help fund its desire to enter the data centre industry.

A2 Milk’s result is due Monday 17 and may include its maiden dividend. The result should also provide a clue as to the direction of the Chinese market, within its commentary.

February reporting season does not include Fisher and Paykel Healthcare, which reports in May. FPH is our largest company, with deep ties to the US market and US economy. 

FPH has already made a company announcement - released to the exchange this morning - stating that the tariffs may have a significant impact from 2026. Its shareholders will be watching the situation unfold very carefully, but the initial reaction has been negative, with the share price falling sharply this morning following the announcement.

Reporting season is always a busy period for markets and this year will be no different. An uncertain international picture will introduce new challenges to our largest companies as they navigate a changing approach from the world's largest economy.

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Travel

Wellington – 4 February – Edward LeeChristchurch – 13 February – Fraser Hunter

Lower Hutt – 20 February – Fraser Hunter

Blenheim – 20 February – Edward Lee

Nelson – 21 February – Edward Lee

Dargaville – 26 February – David Colman

Kerikeri – 27 February – David Colman

Wairarapa – 28 February – Fraser Hunter

Whangarei/Keri Keri – 28 February – David Colman

Napier - Mission Estate - 6 March - Edward Lee

Napier - Havelock North - 7 March - Edward Lee

Please contact us if you would like to make an appointment to see any of our advisers or would like us to visit your area.

Chris Lee & Partners Ltd


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