With French asset risks spreads spiking recently, Nvidia braking one record after another and global yields persistent, despite higher issuance, investment committees are focusing on three questions:
- Are the markets any good at pricing in political risk?
- Can anything stop Nvidia?
- Is a 4.5% yield an opportunity or the new normal?
Let’s start with the first question. Does the finance industry really understand political risks?
In France, Mr Macron joined a long list of Western leaders who got significant market backlash as a result of a political gamble. Spreads with Germany are wider, French large caps were down 7 per cent and billionaires threatened to leave the country if a hard-left coalition gained power. It was not but a few years ago when Francois Hollande, Macron’s former political boss caused another exodus of the ultra-high net worth.
In a world laden with debt, political wiggle room disappears as quickly as fiscal space. The more the potential for government giveaways is reduced, the more world leaders are incentivised to make riskier decisions, and the more uncertain the outcomes. Is higher political risk priced in markets? Or better yet, are markets any good at understanding political risk, especially in historically stable countries, let alone properly price it?
Investment experience shows that markets have a difficult time appreciating non-financial and non-linear risks, which means we need to assume that there are pockets of risk in global geopolitics that may have gone under the radar.
The second question is what (if anything) can stop Nvidia?
Nvidia crossed the threshold to become the world’s most valuable company. It went from a $2tn market cap to a $3tn market cap in the space of a few months, shattering all previous records. Is the former graphics card maker and Warcraft-lovers icon poised to take over the world? What can possibly break its ascendance and, subsequently, the ever-larger weight of tech in global and US equity indices?
For one, the government. Unlike Apple and Microsoft, the company is a virtual monopoly in the high-end microchip space, the equivalent of Standard Oil and JP Morgan 120 years ago.
As such, one can’t help but wonder whether it will face the same fate, that of a government-mandated breakup. Mitigating that risk is Nvidia’s importance in the global race for AI. If a company is considered a strategic asset, a national champion of sorts, then breaking it up is risky.
Another possible obstacle could be a bottleneck energy supply. Demand for AI is already wreaking havoc in domestic power grids. Those grids are already heavily taxed by demand from electric vehicles and are now even more pressured by demand from data centres. Quotas in computing power could significantly ease demand for Nvidia’s product.
It took roughly 100 years from the first to the second industrial revolution (1760 to 1860), from textile mills to the beginnings of mass production. It took nearly 100 more to get from there to the information revolution, which really didn’t take off until the turn of the century. The fourth industrial revolution is happening fast. An infrastructure revolution is quite sure to follow, but will it happen fast enough to cover the voracious energy needs of the next step in human development?
