Market resurgence and inflation anticipation

Most markets experienced positive momentum beginning 2024, particularly in the technology sector. Artificial intelligence (AI) has been reigniting interest lately. After a hesitant start to the year, regional markets rebounded, recovering from declines in the previous five sessions. But only to go down steeply fueled by uncertainties surrounding the Federal Reserve’s stance on early interest rate cuts and Middle-East tensions.

Regional inflation and market sentiment

The spotlight turned to the much anticipated U.S. inflation data later in the week. Encouraging regional inflation readings, notably in Japan, contributed to the positive market sentiment. Japan’s Nikkei 225 index surged by 1.4%, supported by data indicating Tokyo’s inflation in line with projections for December, approaching the Bank of Japan’s annual 2% target.  There were speculations that the Bank of Japan might delay plans to exit ultra-dovish policies, given the need for reconstruction efforts.

AI buzz causes substantial bargain hunting in Tech sector

The enthusiasm in the markets in 2024 is fueled by a notable surge in heavyweight technology stocks, particularly those linked to AI. Advantest Corp., a chip testing equipment maker, soared nearly 7%, standing out as one of the top performers on the Nikkei. Hang Seng index rose by 1%, driven by strength in the technology sector, with Lenovo Group surging 6.1% after unveiling a range of over 40 new AI-powered devices. The AI frenzy saw chipmaker NVIDIA Corporation, a key player in the AI-driven rally of 2023, surging over 6% to reach record highs. KOSPI edged up by 0.3%, supported by broad tech gains. Indian IT giants Infosys, TCS, and Wipro experienced gains exceeding 10% in the initial ten days of 2024.

Anathema for the tech sector

The crucial Consumer Price Index (CPI) data showed headline U.S. inflation accelerated in December, while an annual underlying reading slowed marginally. Rising interest rates pose a dire threat to the technology sector’s equilibrium. Elevated interest rates augment the cost of capital, magnifying operational expenses and diminishing profitability, especially for technology companies reliant on extensive research, development, and capital-intensive projects. The sector’s proclivity for debt financing amplifies the burden, exacerbating financial strain. Moreover, heightened rates reduce the present value of future cash flows, constraining valuations and impeding the sector’s attractiveness to investors. 

Increasing risks of speculative bubbles

, with soaring interest from private equity (PE) contributing to a crowded investment landscape. As the demand for AI stocks intensifies, driven by the promise of transformative technologies, there’s a growing concern that valuations may detach from fundamental realities. PE firms, eager to capitalize on AI’s potential, are flooding the market, creating an environment prone to overvaluation and heightened volatility. This crowded space amplifies the potential for market corrections, as investors grapple with distinguishing between genuinely promising AI ventures and those fueled by speculative fervor, necessitating a cautious approach in navigating this dynamic landscape.

[Disclaimer: This article is for informational purposes and reflect the views of the author. They should not be construed as financial or investment advice. Any investment involves risks, and individuals should carefully consider their investment decisions. The content of this article does not constitute an offer or solicitation to buy or sell any securities. Readers should consult with their financial advisor or conduct their own research before making investment decisions.]

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