With Euphoria Comes Caution
The Nikkei 225 has just crossed ¥50,000 and since the lows of April, the Index has risen by 65% – quite remarkable. Even more striking has been the +20% move over just eight weeks since mid-August. But, as we have often experienced during our careers, such euphoria should be treated with caution.
An old boss at Martin Currie used to refer to this as the “stretched elastic-band syndrome”: markets can remain extended for some time before eventually snapping. Effectively, there are two markets today in Japan: a thematic and AI-dominated one, and almost everything else. A concentrated cohort of stocks driven by the demand for AI now dominate indices.
It is a time to remain calm. For those familiar with our investment process, periods of maximum pain are often the time to add and look for opportunities – and we would note that we have minimal exposure to AI. This lack of exposure has, of course, meant that our portfolios have missed some of the most significant gains in recent months. Still, we simply cannot reconcile valuations with our estimates of longer-run earnings power. Indeed, when the opportunity set for other companies remains exceptionally attractive, chasing ultra-high-multiple stocks is an unattractive use of your capital.
