Rising rates and pressure on stock markets

WEEKLY UPDATE

Rising Interest Rates and Pressure on Stock Markets

European interest rates have risen sharply following the announcement of large defense and infrastructure packages in the EU, particularly in Germany. At the same time, stock markets have faced difficulties, with U.S. stocks continuing the downturn that began in mid-February. The key S&P 500 index has dropped nearly 7%, while the Nasdaq index is down around 10%. Additionally, the European Central Bank (ECB) held a meeting to discuss interest rates, which investors have had to digest.

Massive Investments in Europe – A New Fiscal Approach

One of the main drivers behind the rate hikes is the new political stance in Europe, where there is an increased willingness to invest significantly in defense and infrastructure. The European Commission has announced that defense spending will no longer be included in the budgetary limits set for EU member states, allowing countries to increase investments significantly without hitting previous budget caps. Meanwhile, Germany's incoming Chancellor, Frederik Mertz, has unveiled a massive €500 billion infrastructure package over the next 10 years, along with increased defense spending. These initiatives have heightened future financing needs, pushing up interest rates as investors demand higher risk premiums on government bonds.

Market Turmoil and Fears of Trade Wars

While interest rates have risen in Europe, stock markets there have not experienced the same downturn as in the U.S. Typically, higher rates would pressure stock prices, but the large public investments are creating expectations of increased growth, which is supporting markets. In the U.S., however, the stock market has struggled, despite not seeing the same interest rate increases. Tech stocks have been particularly vulnerable due to concerns over valuation and weaker economic indicators. Political uncertainty, including the risk of a new trade war with higher tariffs, is also adding to investor nervousness, leaving them uncertain about the future direction of U.S. policy.

ECB and Future Rate Decisions

The ECB announced a rate cut of 0.25 percentage points to 2.5%, as expected. However, ECB President Christine Lagarde's statements were cautious, and the central bank has yet to fully assess the impact of Europe's large fiscal packages. Earlier, markets anticipated more rate cuts during the year, but given the current uncertainty, there are now speculations about whether rates could start to rise again. If the ECB shifts its stance, it could have significant consequences for both stock and bond markets in the coming months.

The Job Report: Not as Bad as Feared

Last Friday, the U.S. non-farm payrolls report was released, showing an increase of 151,000 new jobs in February, slightly below expectations, which were between 159,000 and 170,000. The unemployment rate ticked up slightly to 4.1% from 4.0%. The sectors contributing most to job growth were healthcare (52,000 new jobs), financial activities (21,000 jobs), and transportation and warehousing (18,000 jobs). The federal government experienced a decline of 10,000 jobs, marking the first direct effects of Musk’s cost-cutting measures at DOGE.

The market responded with some relief, as fears of even weaker job numbers were not realized. However, investor concerns persist due to the aforementioned uncertainties surrounding trade policies and potential public spending cuts, which may affect the labor market’s strength going forward.

Earnings

In the midst of the turmoil, we saw earnings reports from GitLab, Sea Limited, CrowdStrike, Marvell, MongoDB, Broadcom, and Samsara. Sea, in particular, is going strong, while the others face short-term difficulties, especially Crowdstrike, which may start feeling the impact of the destructive global outage it caused last year, as contracts are now being renewed.

NDI FutureTech

NDI-FutureTech ended this week down around 7%, bringing the year-to-date return down to 2,3%.

NDI-FutureTech has seen significant price drops in recent weeks due to market uncertainty. As always, uncertainty leads to declines in tech stocks. However, uncertainty does not necessarily mean that tech companies are struggling— they simply become cheaper. We have written about market uncertainty in past newsletters, so we will not repeat it, but it is clear that the place to be invested for the next many years is AI-related industries. Along the way, we’ll experience many downturns like the current one, and some will be far worse than the one we have seen so far.

We found an old clip from 1994 with Peter Lynch that you can watch below. Peter Lynch talks about downturns, how they’re inevitable, and how you can't predict them. We believe (but do not know for sure) that market volatility today is greater than in 1994, because information, both positive and uncertainty-inducing, is disseminated in real-time.

Peter Lynch concludes by saying that downturns represent an opportunity if you know what you own. I completely agree with this view. I’m confident that NDI-FutureTech’s returns in 10 years will be significantly better if we experience many downturns like the current one. However, we will admit that we on the team are often in a better mood on the green days, but we know that it’s during these tough periods that the opportunities for generating long-term returns are the greatest, just as Peter Lynch discusses. We cannot predict which companies will fall too much, but some will undoubtedly fall far more than others, even though their long-term potential might be best for those that fall the most. This is where my focus is—on which companies, over the long term, will fall the hardest. That way, we’ll own the right companies when the market turns around. And the market will turn—it’s just a matter of when, and no one knows. But we are closer now than we were two weeks ago.

As for knowing what you own, a follower named wrote, in our view, an excellent description of how NDI-FutureTech can be utilized as part of a diversified overall portfolio:

“It’s important to mention here that this fund is focused on tech, particularly in the U.S. This makes it a great way to diversify your portfolio! You could have individual stocks or ETFs covering other regions, such as Europe, and use this fund to add exposure to U.S. tech with broad diversification. As a rule of thumb, there’s no indication that professional active funds outperform broad indexes. Therefore, active managers are most valuable when it comes to risk diversification, where I don’t have the knowledge, time, or ability to diversify due to transaction costs.”

We could not have put it better ourselves.

THE COMING WEEK

In the coming week, investors and economists will focus on several macroeconomic events that could impact the financial markets.

On Wednesday, U.S. inflation data will be released. This will be the last significant inflation data ahead of the Federal Reserve's next rate decision on March 18-19. While falling oil prices may bring inflation down, it has remained resilient, and the key question is whether it’s still hovering around 3%. This number could impact market expectations for future rate developments and, in turn, affect global stock markets.

On Friday, the week will wrap up with new U.S. consumer confidence figures. Recent data has shown more pessimism among U.S. consumers, so it will be interesting to see if this trend continues. Uncertainty around inflation, tariffs, and economic growth could influence both consumer behavior and corporate investment decisions. All in all, it’s a week full of important data that will give us an indication of the direction for both the Danish and international economies.

Thank you for staying with us. The investment journey continues. While we do not know what the near future holds, we do know where we, and the world, are headed.