Asian indices lead lower as tech fears create an air pocket

It was a topsy-turvy week for markets as equities sold off on fears of rising US inflation and a bubble in tech stocks.

Asia bore the brunt of the reverse, with South Korea’s KOSPI declining as much as 10% before paring losses to close the week down 7.1%. The Nikkei 225 and Hang Seng also felt the heat: the former fell 4.15% on Friday, leaving it down roughly 2.65% for the week, while the latter closed down 5.24% over the same period.

US indices fared little better: by close on Thursday the Nasdaq had recorded its fourth consecutive decline, closing the day on a 4.4% loss for the week. The S&P 500 traded lower to reach a 1.9% loss by Thursday’s close.

Lewis Grant, Senior Portfolio Manager for Global Equities at Federated Hermes, notes that global equity markets have been increasingly narrow and driven by momentum in recent months, with leadership concentrated in a handful of technology names, particularly semiconductors and memory. 

“In markets like this, air pockets are to be expected,” he says. “Not every down day signals a rotation, or a change in leadership. Investors would do well to resist the urge to overinterpret short-term moves.”

There are also positives for investors, says Grant, not least an easing of political tensions in the Middle East – meaning oil prices have begun to drift back to more normal levels. “But macro indicators and consumer spending data have also been more resilient than many expected,” he says. “Valuations, while not cheap, still look reasonable in the context of expanding margins across the AI ecosystem. There will of course be more volatility, and some of the laggards – particularly software – will at some point start to look oversold. But it’s important to be patient. Investors who stay focused on fundamentals and keep a long-term mindset are typically the ones who will most successfully navigate the volatility.”

Muted gilts look beyond UK political turmoil

In the UK, the resignation of Prime Minister Keir Starmer opened the door to a Labor Party leadership contest with former Manchester mayor Andy Burnham tipped as the frontrunner.

According to Filippo Alloatti, Head of Financials for Credit at Federated Hermes, Starmer’s resignation was something of a non-event in terms of the investor response.  He notes that markets have been more focused on the positives: a reduction in political volatility and the prospect of a swift leadership transition. 

“The relatively muted reaction in gilt markets is particularly notable,” he says. “Investors appear reassured that a rapid and orderly transition would limit political uncertainty and reduce the risk of policy disruption. For markets, clarity matters more than continuity, and a quick leadership resolution would help contain risk premia.”

In the longer term, however, any optimism should be tempered by the fiscal realities facing the next government, according to Alloatti. “The UK's public finances leave scant room for meaningful spending increases, particularly with government borrowing costs remaining elevated,” he says. “Any perception of fiscal loosening would likely be met with higher gilt yields, reflecting investor sensitivity to fiscal credibility following previous market disruptions.”