A Double Blow: The Bursting of the AI Bubble and European Instability – 長期投資で年金問題なんて怖くない

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Stock prices in both Japan and the U.S. have been weak, with semiconductor and AI-related stocks experiencing significant declines. In the U.S. market, shares of GE Vernova—linked to power infrastructure for data centers—fell 11.53% week-on-week, while nVent dropped 11.71% and Caterpillar declined 6.63%. In Japan, semiconductor-related stocks saw notable losses: SCREEN Holdings fell 15.82%, Tokyo Electron dropped 11.03%, and Disco declined 8.47%.

As stock prices have fallen, forward price-to-earnings (PER) ratios have also declined; Kioxia’s PER, for instance, has dropped to 3.6x. With Kioxia’s earnings announcement scheduled for October 30, the question remains: will there be any catalysts to trigger a rebound? Investors will be watching for potential announcements such as dividend payments or share buybacks.

・Komatsu vs. Caterpillar

Both stocks saw sharp declines this week. The Caterpillar-to-Komatsu ratio currently stands at 7.94x; while it had reached approximately 13x in June, the decline in Caterpillar’s share price has pushed the ratio lower.

Caterpillar’s PER, which had climbed to 40x in June, has now fallen to 25x.

Both companies are set to release their earnings on October 29. Will there be any news to spark a recovery in their share prices?

・Stocks Trading Below 1x PBR: 580 (within the TOPIX index)

The number of stocks trading below a price-to-book ratio (PBR) of 1x has risen by 29 from the previous week, reaching 580.

The NT ratio (Nikkei 225/TOPIX) has declined from 16.06x the previous week to 15.80x.

・France: In Trouble

Capital is currently flowing out of France. Yields on French government bonds are currently higher than those of Greece and Italy—countries with lower credit ratings—representing an inversion. Furthermore, France’s credit default swap (CDS) spread has widened to 103.19 basis points (bps), roughly double that of Greece (52.15 bps).

In the French market, corporate bonds are also being sold off, leading to a widening of “T-spreads” (yield spreads over government bonds). For instance, the T-spread on Carrefour’s 4.125% bonds maturing in October 2028 (rated BBB) has expanded from around 40 bps in early September to 73.7 bps. The current yield to maturity is 3.92%. When swapped into Japanese yen, the yield for this bond—which has two years remaining—comes to approximately 2.47%, an attractive level.

The current turmoil in France has triggered a sell-off in corporate bonds, creating an opportunity to pick up oversold issues.

It appears that Japanese institutional investors are reducing their holdings of European bonds, with the proceeds likely flowing into Japanese Government Bonds (JGBs). The instability in Europe could also serve as a catalyst for a stronger yen.

・Japanese Government Bonds (JGBs): Bull Flattening

Yields on ultra-long-term JGBs have fallen sharply, causing the yield curve to “bull flatten.” Meanwhile, 2-year JGBs have faced selling pressure due to concerns over potential interest rate hikes. The spread between 10-year and 2-year JGB yields has fallen below 1%, currently standing at 0.924%.

・U.S. Stock Market: Strength in Cybersecurity and Defense

In the U.S. equity market, stocks in the defense and cybersecurity sectors are seeing gains. Lockheed Martin’s share price rose 9.44% week-on-week, while Northrop Grumman climbed 6.07%. In the cybersecurity space, Okta surged 13.77% and Zscaler jumped 23.03%. In contrast, Japanese cybersecurity-related stocks have remained weak, showing a divergence from the trend seen in the U.S. – U.S. Credit Market: Widening T-spreads for SpaceX

The T-spreads (yield spreads over U.S. Treasuries) on corporate bonds issued by SpaceX in July have widened. For the 6.65% notes maturing in July 2056—the longest-dated issue—the spread has expanded from 175 basis points (bps) at the time of issuance to approximately 350.85 bps. For the shortest-dated issue, the 5.35% notes maturing in July 2031, the spread has widened from 110 bps to 260.16 bps. Rising financing costs are a negative factor for the company’s stock price.

T-spreads for investment-grade bonds have also widened,

suggesting that capital is flowing into U.S. Treasuries.

– Commodities

While prices for wheat, corn, and soybeans declined this week, crude oil prices remained elevated. Crude oil closed the week at $103.37 per barrel—up 1.9% from the previous week’s close of $101.41. High oil prices are one of the factors contributing to the current turbulence in the stock market.

– India: Declines Led by Small-Cap Stocks

The Indian stock market has experienced a decline, led by small-cap stocks. The BSE SmallCap Index—the only index to have maintained a positive year-to-date return—has seen that figure drop to 0.9%, putting it at risk of slipping into negative territory.