In recent weeks, some of you reached out to us in order to understand why your Inyova portfolio is currently generating lower returns than broad stocks indexes and benchmarks. To answer this question, we would like to dig a bit deeper and put the recent developments into a broader context.
2023 – a turbulent year
The global stock market has been on a roller coaster ride in 2023. We’ve seen strong ups and downs in stock prices as investors have weighed the risks and rewards of investing in the face of rising inflation, interest rates, and geopolitical uncertainty.
Here are some of the major developments on the global stock market in 2023:
- Russia’s invasion of Ukraine: Russia’s unsolicited invasion of Ukraine has been a major source of uncertainty for investors, leading to geopolitical instability, higher energy prices and disrupted supply chains. This has caused inflation and triggered central banks to act.
- Rising inflation and interest rates: Inflation has been rising in many countries, putting pressure on corporate profits and consumer spending. Central banks around the world including the FED and the ECB have raised interest rates several times in 2023 in an effort to fight inflation. This will make it more expensive for businesses to borrow money and invest, which could lead to slower economic growth and, at worst, a global recession.
- Geopolitical uncertainty: The global economy is facing a number of geopolitical risks, including the invasion of Ukraine, the ongoing trade war between the United States and China, and the political instability in many countries.
- Banking crisis: The 2023 banking crisis was caused by a combination of factors, including rising inflation, interest rates, and the invasion of Ukraine. Part of this crisis was the near bankruptcy of the US-based Silicon Valley Bank. But also Europe was affected: Credit Suisse was taken over by UBS in March 2023 after it was hit by a series of scandals and financial losses.
What does this mean for the stock markets?
Although the stock market has stabilised since May, volatility remains high. Investors are still trying to assess the impact of the various risks on the global economy. It is still unclear how the market will perform in the remainder of the year. One development is very interesting though: Despite the volatility, the Nasdaq-100 has risen strongly in value in 2023. The Nasdaq-100 has gained over +35% in 2023. During the same period, the STOXX Europe 600 index only increased by roughly +5.5% and the Swiss Performance Index is only up approximately +4% (last updated: 28 August 2023).
What’s the Nasdaq-100?
The Nasdaq-100 is a stock market index that tracks the performance of the 100 largest non-financial companies listed on the Nasdaq stock exchange. The index includes many of the largest technology companies in the world, such as Apple, Microsoft, Amazon, and Alphabet. In this index, stocks with the largest market capitalisations have the greatest influence on the index’s performance.
The Nasdaq-100 is heavily weighted towards technology stocks, while the S&P 500 and other broad indices like the STOXX 600 Europe, the Swiss Performance Index and the DAX are more diversified across industries. This is because the Nasdaq-100 only includes companies listed on the Nasdaq stock exchange, which is known for its technology sector. Other broad indices, on the other hand, include companies listed on all major stock exchanges.
So it’s mainly big tech companies that are influencing the positive development?
Yes! While many sectors have grown slowly in value and stayed volatile, one sector outperformed significantly: AI stocks and mega tech companies. In fact, the strong +35% increase in the Nasdaq-100 is driven by only seven companies: Microsoft, Apple, Alphabet, Amazon, NVIDIA, Meta and Tesla. At this point, these companies account for more than half the value of the Nasdaq-100 and are also the key contributors to the S&P 500 growth. These companies are not only the US tech giants but also at the forefront of the AI revolution.
AI stocks have been some of the best-performing stocks in the market in recent years. This is because AI is a rapidly growing technology with the potential to revolutionise many industries. As a result, investors are eager to get exposure to AI stocks. Although tech companies are at the forefront, it’s unclear whether this new business model works and will drive long-term profits.
On the other hand, AI stocks are also some of the most volatile and risky stocks in the market. This is because AI is still a relatively new technology, and there is a lot of uncertainty about how it will be used and what its long-term impact will be. The danger is that the hype might be over soon – similar to previous hypes, these stocks might fall rapidly again in the future and so will the indexes. This is especially true if the index growth is based on half a dozen companies only.
What does it mean for my Inyova portfolio?
Your Inyova portfolio is structured very balanced and has exposure to a broad range of sectors. The aim is to generate returns in line with the overall market performance. Your portfolio might contain large tech companies that are also champions in sustainability areas, e.g. NVIDIA and Microsoft. Nevertheless, in order to generate long-term profits we focus on diversification and do not put all our eggs in one basket. Hence, the exposure to the mega tech companies is lower than in market benchmarks (such as the Nasdaq-100) and your portfolio might show a lower performance than the market benchmarks.
How does Inyova react to the latest developments?
Firstly, we are continuously reviewing your portfolio and making sure that it is well-diversified. Secondly, we also constantly assess whether we want to add new companies in innovative fields like AI. If we find interesting companies that also meet our strict performance and sustainability criteria, we will add them to the Inyova universe. In addition to that, we’ve addressed the AI trend by reworking the topic AI and Digital Champions in our universe.
One thing that we will definitely avoid is jumping on a trend without taking the risks into account. Thus, we will not blindly adjust your portfolios based on past performance. Instead, your investment with Inyova is a long-term approach that focuses on the generation of long-term profits.
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