Japan sees first rate hike in 17 years, Nvidia unveils new tech and Unilever to spin off ice cream division and cut jobs

“It’s not often that equities rise after an interest rate hike, but that’s exactly what happened in Japan,” says Russ Mould, Investment Director at AJ Bell.

“The Bank of Japan’s monetary policy decision is hugely significant. Japan’s cost of borrowing has gone up for the first time in 17 years after its wish for inflation finally came true. Japan’s interest rate has been below zero since 2016 in an attempt to stimulate the economy, but it’s now been lifted to a 0%-0.1% range.

“Japan’s Nikkei 225 has been the best performing major market index globally over the past 12 months, up 45% and just beating the ferocious tech-heavy Nasdaq 100 index in the US which has advanced 44%. Investors have been attracted to Japan’s relatively cheap valuations, the prospect of more generous dividends and as an alternative way to get Asian exposure to China which has disappointed of late.

“The key question now is whether the rate hike represents a ceiling for the index for the time being. With other countries expected to cut rates, investors lucky enough to have made money from Japan over the past year might recycle some proceeds elsewhere.

“European markets were flat and future prices imply a lacklustre session from the US when its markets open later on. Investors are likely to be sitting on their hands until the Fed unveils its latest interest rate decision tomorrow. A rate cut looks unlikely at this meeting so the big focus will be on economic projections and how many rate cuts we might see later in the year.

“On the UK market, the FTSE 100 traded 1.7 points lower at 7,720. Commodity producers did their best to lift the index, along with Unilever on news it plans to spin off its ice cream division. Yet consumer companies, utilities and healthcare acted as a drag.

“Sofa seller DFS slumped 8% after a miserable start to the calendar year. Revenue guidance has been lowered and the company doesn’t believe consumer confidence will improve enough to boost demand for its products until its next financial year which starts in late June 2024.”

Nvidia

“When the launch of a new computer chip is plastered all over the news, you know either the product or the company behind it has struck a chord with the public.

“Nvidia has become the face for AI – investors have made a packet owning its shares and companies are clambering to work with the chip group, either as customers or partners. Therefore, it was no surprise to see its annual developer conference be treated with the same glitz and glamour as Apple used to experience with its product launches or even something more akin to an awards ceremony or film premiere.

“Nvidia unveiled a new AI chip which it says can perform some tasks 30 times faster than its predecessor, as well as announcing a new set of software tools that could make it easier for a business to incorporate AI in its work.

“Competition is heating up in the AI space and Nvidia is under pressure to constantly innovate and stay one step ahead of the game. The market reaction to the news was negative which suggests that Nvidia did what was expected but nothing more.

“The shares have rallied hard since the start of 2023, including an 80%-plus advance this year alone. That’s essentially investors pricing in perfection from the company and so if it only meets rather than exceeds expectations with events such as yesterday’s, the shares might find it harder to keep rising. This is a problem that most stock market superstars experience along the way. Their success means the bar is always set at the highest level and sometimes it is impossible to clear it.

“Nvidia needs to sell the new chip and software tools by the bucketload and get customers to prove they make a difference. As far as it is concerned, the hype is real. Yet it is very hard to sustain such high levels of growth quarter after quarter.”

Unilever

“When the market was speculating about steps Unilever might take to revive its fortunes, a spin-off of its ice cream division had not been that widely discussed – even if political pronouncements from Ben & Jerry’s had provoked a meltdown among some investors.

“A side benefit of the brand exiting Unilever’s portfolio is it might quieten the ‘go woke and go broke’ noise but more widely the reasoning for the decision looks pretty sound.

“It costs the company more to sustain the ice cream business, there is a different supply chain because it is dealing with frozen goods and it’s more seasonal than the company’s other roster of brands.

“A demerger and separate stock market listing for the ice cream arm is seen by Unilever as the most likely outcome with a fairly tight deadline of the end of next year set by the company. Less than a year into his tenure, CEO Hein Schumacher is certainly making his mark on the group.

“Schumacher will ultimately be judged on his ability to revive the fortunes of the remaining ‘simplified’ operation. Job cuts and efficiency savings are straight out of the corporate turnaround playbook but that doesn’t mean they are without any merit.

“There will still need to be investment in the company’s key brands and sensible positioning to ensure the company retains its pricing power.

“Achieving underlying sales growth and margin improvement doesn’t sound an overly ambitious goal but given the extent of price increases consumers have had to stomach thanks to inflation it may not be easy to achieve.

“The danger for Unilever is that people are put off its branded goods because of the cost and they turn to cheaper supermarket own-brand alternatives. This risk is particularly acute in the West where quality unbranded goods are widely available. Unilever is in a stronger position in emerging markets where the same choice is not as freely available.”

These articles are for information purposes only and are not a personal recommendation or advice.