Software Slaughterhouse

One of the criticisms levelled at index funds in the past few years, is that the market has come to be dominated by one country (America) and one sector (tech).

As index funds “blindly” buy these names regardless of price, so the theory goes, when these names crack it will be a big problemo for the market.

Well, most of them are cracking.

Source: FE Analytics. Returns are shown in GBP terms, and start date is taken as Nvidia’s recent peak.

Even the worst of the above drawdowns are run of the mill pullbacks that one should expect as par for the course when they invest in single stocks. Bad, often unforeseen, things happen to “great” companies all of the time.

But the news is even worse elsewhere. Software stocks are getting slaughtered.

Source: FE Analytics. Returns are shown in GBP terms, and start date is taken as Nvidia’s recent peak.

And crypto has been crucified.

Source: FE Analytics. Returns are shown in GBP terms, and start date is taken as Nvidia’s recent peak.

Any time a new technology comes to the fore, there will be winners and losers. And the perception of who these winners and losers will be within the market shifts and changes constantly.

The current narrative around AI is that the corporate efficiency it brings will not be good news for “business to business” providers who make it their raison d’etre to provide software solutions to other companies.

If a company can build their own in-house AI agent to review the books and handle their tax returns, why would they pay Intuit for example to do the same job at a multiple of the cost?

For investors who are properly diversified however the news is rather better. Despite all of the above, global markets have barely budged and are a sniff away from all time highs.

Source: FE Analytics. Returns are shown for the MSCI All Country World Index, in GBP terms. Dividends reinvested.

How has this happened? Well, simply put, the rotation out of tech names has been accompanied by an equal rotation into the stuff that has been less loved over the past decade. The money isn’t coming out of the market, and it has to go somewhere.

Energy stocks.

Source: FE Analytics. One year returns are shown in GBP terms with dividends reinvested.

Financials.

Source: FE Analytics. One year returns are shown in GBP terms with dividends reinvested.

Non-US markets.

Source: FE Analytics. One year returns are shown in GBP terms with dividends reinvested.

I think this is great news for the overall market, and just about one of the most bullish things we could see. Former leaders passing on the baton to other sectors, and the overall market just chugs on, happy as larry.

Whether this one lasts, who knows. But these kinds of rotations have happened in the past, and when they do they can be quite violent and prolonged.

This is one of the reasons that I advocate for a globally diversified investment strategy, which does not seek to predict trends or market oscillations - but which accepts that mean reversion is a thing, and that narratives can shift on a sixpence.

Quicker than anyone can possibly realise in real-time.

None of the above is intended to constitute investment advice. Past performance is not indicative of future returns. If you have any questions regarding your individual situation, please consult with a regulated financial adviser.