• Big Tech and semiconductor companies have significant potential to deliver strong earnings growth and multiple expansion, which should drive share prices higher. Investors should consider making this sector a core allocation in their portfolios.
• Recently published data showed that US inflation is reaccelerating. A robust economy and rising geopolitical tensions will keep the inflation threat alive. Consequently, we retain our view that the Fed will hold rates steady in 2024. Cutting rates at a time where the economy is doing well risks stoking inflation.
• In terms of positioning, we reiterate our preference for short duration bonds over long duration bonds. Yields on short duration bonds remain compelling, and we believe that the yield on longer duration bonds is insufficient to compensate investors for the duration risk they are taking. With regards to equities, investors should prioritise quality stocks and commodity-related stocks as these companies are likely to do well in this environment.
• The recent rally in Chinese equities was driven by sentiment rather than an improvement in underlying fundamentals. Our stance has not changed, and we urge investors to underweight China as the market carries substantial risks with limited upside potential.
Why investors should continue to load up on Big Tech and chip stocks
Lately, tech stocks have taken a breather following a blistering rally that sent share prices of several companies to record highs (Figure 1). This comes after a string of hotter than expected inflation readings and weak guidance from several tech companies dented investors’ confidence.
For instance, Meta said that revenue growth in the coming quarters is expected to be slower, while expenses are going to increase due to higher infrastructure and legal costs. Furthermore, the company plans to raise capital spending to support its AI research and product development efforts.
Chip stocks also tumbled after TSMC lowered its 2024 growth forecast for the overall semiconductor industry as well as for the foundry sector – citing macroeconomic and geopolitical headwinds weighing on end user demand. Contrary to investors’ expectations, TSMC also left its capital spending plans for the year unchanged, a move that was interpreted by investors as demand not being as robust as anticipated.
Even so, their year-to-date performance is nothing short of remarkable. As of 3 May 2024, the Invesco Nasdaq Internet ETF (NASDAQ:PNQI) and the VanEck Semiconductor ETF (NASDAQ:SMH) have risen by 10.1% and 25.8% respectively, far surpassing the S&P 500 Index’s return of 9.9%. We believe that the recent pullback in share prices is primarily news driven as the fundamentals of the sector remain robust.
Figure 1: Tech stocks are still among the best performing companies year-to-date
In fact, the communication services and tech sector are poised to deliver earnings growth of 38.3% and 22.4% year-on-year in 2024 respectively, among the highest across all sectors and way above the S&P 500 Index’s earnings growth of 11.6% according to data compiled by Bloomberg (Figure 2). Earnings growth is a crucial factor that will drive share prices to new heights.
Figure 2: The communication services and tech sector are expected to deliver the strongest earnings growth in 2024
As the world becomes increasingly digitalised, tech companies will have an even larger role to fulfill as demand for their products and services skyrockets. The AI megatrend illustrates this perfectly. Over the past year, the rapid adoption of AI has cast a spotlight not only on the companies that harness AI, but also on the ones that enable it.
Chipmaker NVIDIA saw its revenue more than double in FY2024 as demand for AI chips surged. Cloud service providers (e.g. Microsoft, Amazon and Google) have snapped up much of these chips as they continue to integrate AI solutions into their products. The trio also managed to surpass growth expectations in their latest earnings results. Microsoft in particular, said that revenue for its cloud services climbed 31% in 1Q24, and nearly a quarter of that growth is attributable to AI services.
Overall, investors should continue to increase their exposure to the tech sector as we believe that the long-term growth story remains intact. We recommend investors to focus on Big Tech stocks, which tend to possess not only stronger earnings growth potential and balance sheets, but also a global business model which allows them to operate anywhere across the world. Lastly, given the importance of the tech sector today, we would like to reiterate that it should be a core allocation among investor’s portfolios.
Table 1: Recommended products to consider
|
Market / Sector |
Recommended Product |
|
Big Tech |
|
|
Semiconductors |
|
|
Broad-Based Tech Exposure |
Related Articles:
Chip stocks have soared to record highs. Why share prices still have room to climb.
Missed the rally in Big Tech? The recent pullback in share prices may be your opportunity to enter.
Forget rate cuts. Be prepared for interest rates to remain higher for longer.
Recently published US inflation data showed a disturbing trend - inflation is reaccelerating.
As of March 2024, US consumer prices (measured by the CPI) rose by 3.5% year-on-year, above the median consensus forecast of a 3.4% gain and February’s reading of 3.2%. The latest figure also marks the highest level of inflation observed over the past six months. Meanwhile core inflation, as measured by the Fed’s preferred gauge (the core PCE price index) also rose from 2.5% in February to 2.7% in March. The data underscores the challenges of getting inflation back to 2%, especially in the latter stages of the battle.
Figure 3: Inflation has made a comeback in recent months
While this does not come as a surprise to us as we have been warning of higher for longer inflation & interest rates, both the markets and the Fed have been prompted to reevaluate their rate cut expectations. According to the CME FedWatch Tool, investors have trimmed their rate cut expectations to just one this year, down from six rate cuts at the beginning of the year.
In a press conference after April’s FOMC policy meeting, Fed chair Jerome Powell said that the past few months of higher-than-expected inflation has dented the committee’s confidence that inflation is ebbing, and that persistently high inflation will likely delay the onset of rate cuts. Several other committee members also echoed the same sentiment.
The shift in market sentiment can clearly be observed in bond markets, as the US 10-year treasury yield rose from 3.9% at the beginning of the year to approximately 4.6% today. This is a rude awakening for investors who increased their duration exposure earlier in the year as longer duration bonds have significantly underperformed their shorter duration counterparts year-to-date.
Figure 4: Long duration bonds have underperformed their short duration counterparts this year
Going forward, we reiterate our stance that inflation and interest rates will stay higher for longer.
The recent developments on the inflation front are a clear indication that the battle is far from won. Rising tensions in the Middle East and a robust US economy will keep the inflation threat alive. Cutting rates at a time where the economy is doing well risks stoking inflation, which is the last thing the Fed wants to do now. As a matter of fact, investors should be concerned about the possibility of rate hikes, especially if inflation continues on its current trajectory.
In terms of positioning for fixed income, investors should continue to overweight short duration bonds over long duration bonds. Yields on short duration bonds remain compelling, and we believe that the yield on longer duration bonds is insufficient to compensate investors for the duration risk they are taking. With regards to equities, investors should prioritise quality stocks and commodity-related stocks as these companies are likely to do well in this environment.
Table 2: Recommended products to consider
|
Market / Sector |
Recommended Product |
|
Short duration bonds |
|
|
Quality companies |
|
|
Commodity-linked equities |
Related Articles:
10y UST yields are back above 4.5%. Is it time to add duration?
As we predicted, interest rate cuts are looking less likely. Here’s why
Don’t be tempted by the comeback in Chinese equities
Lately, investors of Chinese equities have plenty to be happy about. The MSCI China Index has finally emerged from its January lows and into a bull market. Much of the gains were accumulated over the course of the last few weeks after China announced that it had achieved GDP growth of 5.3% in 1Q24, putting it on track to meet its target of 5% growth for the full year.
A closer look at the numbers shows that the gains were largely driven by public investment (+7.8% year-on-year), as the Chinese government continues to push for greater investment in strategic sectors such as semiconductors. Private investment on the other hand remains sluggish with a growth rate of just 0.5% year-on-year (Figure 5).
Figure 5: 1Q24 GDP growth driven mainly by investment
There are also signs that China’s factories may be struggling with overcapacity, as the industrial capacity utilisation rate fell to 73.6% in 1Q24, the lowest level since 2Q20. The country is also grappling with deflation, with producer prices falling by -2.8% in March, marking 18 consecutive months of decline. Consumer prices aren’t doing much better, as they fell back to 0.1% year-on-year in March vs 0.7% in February as the positive impact of the Lunar New Year holiday dissipated.
Consumer spending, which powered much of China’s growth in 2023 after the government lifted its zero covid policy, seems unlikely to do the same in 2024. Retail sales climbed just 3.1% in March, falling well short of the market’s forecast of a 4.5% gain. With the property market in shambles, Chinese consumers have every reason to be cautious.
Ultimately, we surmise that the recent rally was driven by the fear of missing out on cheap Chinese stocks and speculation on the strengthening domestic stimulus, rather than an improvement in underlying fundamentals.
We urge investors to remain underweight on China, as the market carries substantial risks with limited upside potential. While China still is the largest economy in Asia, it may be worthwhile for investors to explore other markets which offer more promising opportunities, such as the 'New Asian Tigers' - Singapore, Japan, and South Korea.
Table 3: Recommended products
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Countries |
Unit Trusts |
ETFs |
|
Singapore |
||
|
Japan |
||
|
South Korea |
Related Article: Interpreting China's 5.3% GDP Growth in 1Q24: A Positive Sign?
Declaration:
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