GREED & fear_ Inflation, gold and Ukraine

Summary of Key Points from the Conference Call Industry Overview - Inflation Trends: The Federal Reserve's inflation target appears to be structurally higher post-pandemic, with US headline CPI rising by 0.5% MoM and 3.0% YoY in January, exceeding consensus estimates of 0.3% MoM and 2.9% YoY [1][4] - Bond Market Reaction: Following the inflation data, the bond market experienced a sell-off, with the 10-year yield rising to 4.60%, a 95 basis point increase since the Fed began easing in September [4][5] Employment Data - Nonfarm Payrolls: US nonfarm payrolls increased by 143,000 in January, below the consensus expectation of 175,000, with government and healthcare/social assistance sectors accounting for 67% of job gains over the past year [4][8] Hyperscaler Investment Trends - Capex Increase: Hyperscalers are projected to invest US$320 billion in capital expenditures in 2025, up from US$230 billion in 2024, indicating a strong commitment to the AI arms race [10][11] - Data Center Construction: Private construction spending for data centers has surged by 51% over the past two years, now accounting for 38% of private office construction [14][16] Financial Implications for Hyperscalers - Depreciation Strategies: Companies like Meta are extending the expected life of their assets to reduce depreciation expenses, which can impact free cash flow generation [19][20] - Market Sensitivity: Stocks of hyperscalers remain sensitive to free cash flow deterioration, as seen with Meta's negative share price reaction to its Metaverse investments [19][23] European Market Dynamics - Ukraine Conflict: The potential resolution of the Ukraine conflict could benefit European stocks, particularly if Russian energy supplies resume [38][39] - MSCI Performance: MSCI Europe has outperformed MSCI AC World by 6.8% since late December, indicating a positive market sentiment towards European equities [39][40] Gold Market Insights - Central Bank Purchases: Central banks bought a net 333 tonnes of gold in Q4 2024, continuing a trend of significant gold accumulation since the onset of the Ukraine conflict [50][52] - ETF Holdings Decline: Gold holdings by ETFs have decreased by 843 tonnes (24.4%) from their peak in October 2020, despite rising gold prices [48][50] - China's Gold Investment: China has initiated a pilot program allowing insurance companies to invest up to 1% of their assets in gold, potentially translating to US$27 billion in buying power [73][74] Investment Recommendations - Portfolio Adjustments: GREED & fear recommends increasing allocations to both Europe and China, adjusting weightings in the Asia Pacific ex-Japan portfolio to reflect rising neutral weightings [76][77] Conclusion - The current economic landscape is characterized by rising inflation, significant investments by hyperscalers in AI and data centers, and a potential shift in European market dynamics due to geopolitical developments. The gold market remains robust, driven by central bank purchases and new investment avenues in China.