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The stock market is a master at shrugging off seemingly serious issues…until it doesn’t.
We saw this most clearly with the brewing Covid pandemic. In January and early February 2020, markets were climbing to record highs, even as word spread about a serious virus sweeping across parts of China.
Then, all of a sudden, investors panicked and both the S&P 500 and FTSE 100 crashed more than 30% in just over a month!
Might something similar be happening now with the Israel-Iran war? The market has acted calmly so far, but President Trump has accused both nations of immediately violating the ceasefire that the US just brokered. So the conflict could still escalate from here.
The most obvious economic risk is if Iran carries out its threat to shut down shipping through the Strait of Hormuz. Around 20% of the world’s oil supply passes through this narrow strip of water every day.
The most likely outcome of that would be a sudden spike in oil prices, which would increase inflation and rattle the global economy.
As the IMF’s Kristalina Georgieva told Bloomberg TV, “There could be secondary and tertiary impacts. Let’s say there is more turbulence that goes into hitting growth prospects in large economies, then you have a trigger impact of downward revisions in prospects for global growth”.
As I type, the S&P 500 is up 0.8% to 6,072. Clearly, investors aren’t concerned, at least not yet.
AI at a discount
Looking at the S&P 500, which is up 22% since 8 April, many growth stocks look very overvalued to me. For example, Palantir is trading at 112 times sales, which is a sky-high multiple, especially when there’s a lot of uncertainty in the global economy.
Therefore, investors might want to consider the FTSE 100 instead. It’s still full of shares that are trading cheaply.
However, that doesn’t mean that one has to forsake growth. Take Polar Capital Technology Trust (LSE: PCT). The tech-focused investment trust, which holds 98 stocks, is extremely bullish on the game-changing potential of AI.
We are unashamed, self-confessed AI maximalists and are hugely excited about AI as a strategic, long-term theme.
Polar Capital Technology Trust
Perhaps unsurprisingly, the investment firm holds plenty of Big Tech names, including Nvidia, Meta, and Microsoft. However, I like that there’s a cybersecurity angle here too, as this technology will only grow in importance as the digital/AI revolution deepens.
With hacking and cyber attacks on the rise, cybersecurity is now a necessity rather than a luxury. Top names held in this space include Palo Alto Networks, Crowdstrike, and Cloudflare.
As mentioned above, a big risk right now is an escalation in the Middle East conflict and rising oil prices. Were global economic growth to be hit, then company earnings could come in light, impacting the trust’s portfolio.
However, what I like here is that the shares are currently trading at a 10% discount to net asset value (NAV). So investors can effectively buy into the AI-themed portfolio for less than the market value of the underlying holdings.
Nobody ultimately knows if a crash is imminent. But whatever happens, I’m bullish on Polar Capital Technology Trust shares long term. I think they’re worth considering, especially if the market has any type of wobble.
