· Over the past week, many markets faced sharp declines due to various market fears.
· We believe these market selloffs are based on near-term sentiment rather than changes in fundamentals. We still expect corporate earnings to remain robust which should drive share prices in the long-term.
· While the strengthening of the yen has lessened the appeal of yen carry trades, hurt Japanese exporters due to larger FX losses and triggered margin calls, we believe the Japanese equity market has room to run, driven by underlying structural factors that remain intact.
· The weak US labour data released last week has led to fears of a potential recession. However, we maintain our view that the US economy remains resilient.
· Hence, we remain bullish in these markets and recommend investors to not panic sell and to instead, buy the dip.
On 5 August 2024, the S&P 500 Index fell by 3.00% from the previous day. Other markets also experienced sharp declines with the Nikkei 225 falling by 12.40%, the KOSPI by 8.77%, and TAIEX by 8.35%.
In this article, we discuss the reasons behind the market selloff across these markets.
Figure 1: Widespread market selloffs seen across various markets
Tech bubble fears overblown
Firstly, concerns about tech stocks have been growing as investors worry that their prices may have risen beyond their earning potential. This fear intensified after a mixed earnings season, where substantial AI investments by large-cap companies led investors to question the potential returns.
As for chip stocks, there have been reports that US regulators might introduce stricter rules to further limit chip exports to China. Although some restrictions are already in place, the Biden administration is said to be considering more stringent measures, such as the Foreign Direct Product Rule (FDPR), which would restrict the export of semiconductor products containing even the tiniest amount of US technology used in their production.
Despite the selloff, we note that major tech ETFs like the Invesco NASDAQ Internet ETF (NASDAQ: PNQI) and VanEck Semiconductor ETF (NASDAQ: SMH) are still delivering YTD returns of 3.6% and 22.0% as of 5 August 2024 respectively.
Figure 2: Despite the recent selloff, US tech stocks are still in the green this year.
We believe the recent market downturn is largely due to negative sentiment rather than any material deterioration in fundamentals.
Alphabet experienced a selloff after its earnings report, despite exceeding estimates for both revenue and profit. Microsoft also faced a significant decline in its stock price following a major cloud service outage, which contributed to the overall negative sentiment toward tech stocks.
With several tech companies' stock prices near their all-time highs before the selloff, investors might be quick to take profits at the slightest hint of bad news. While there are concerns about a tech bubble fuelled by excessive AI investment, we consider these worries to be exaggerated. For instance, hyperscalers heavily investing in AI have reported healthy demand for their services. Additionally, incumbents have access to substantial capital, low costs of capital, and massive distribution networks and customer bases. This allows them to experiment with AI investments to eventually earn a return. Despite the uncertainty of outcomes, the opportunity cost of pursuing these strategies appears small compared to the potential of building the foundation for the next major computing architecture.
We remain bullish in US tech and chip stocks due to the increasing demand for artificial intelligence (AI) and as businesses get increasingly digitalised. Looking at the Magnificent Seven stocks, they have all delivered positive EPS growth ranging between 10% to 461% and yet, their share prices have fallen from the peak on 16 July 2024.
Table 1: Recent development of the Magnificent Seven stocks
|
Company |
Latest EPS growth YoY |
Performance since 16 July 2024 peak |
Latest Development in the past month |
|
Apple |
11% |
-6.37% |
Apple to launch AI features updates |
|
Microsoft |
10% |
-9.13% |
Continue to spend more on AI-related initiatives while latest Azure revenue slowed to 29% QoQ (vs 31% in the past quarter) |
|
NVIDIA |
461% |
-15.11% |
Prepares version of flagship AI chips for China; AMD impressive results prompt positive sentiment |
|
Alphabet |
31% |
-9.38% |
Beats 2Q24 estimates with cloud revenues surpassing USD 10 billion |
|
Amazon |
55% |
-13.01% |
Forecasted net sales USD 154-158.5 billion, falling short of consensus estimates of USD 158 billion |
|
Meta Platforms |
73% |
-0.34% |
Raising CAPEX outlook amid advertising softness |
|
Tesla |
42% |
-19.06% |
Another disappointing profit and postponed a highly anticipated unveiling of Robotaxis |
|
Source: Bloomberg Finance L.P., iFAST Compilation. Data as of 5 August 2024. |
|||
Looking ahead, all of the Magnificent Seven companies excluding Tesla have provided higher earnings guidance. Moreover, analysts are expecting US tech firms to continue delivering strong earnings growth in the coming years. Hence, as earnings continue its upward trajectory, it would potentially drive share prices up.
Figure 3: US tech firms are expected to deliver strong earnings growth in the years ahead.
Related article: US tech stocks are now on sale. Don’t miss this opportunity.
Tech-heavy economies like South Korea and Taiwan were not spared from the selloff as well. On 5 August 2024, South Korea’s equity market decline was led by Samsung Electronics and SK Hynix while the decline in Taiwan’s equity market was led by TSMC as it suffered its worst trading day in 57 years. Moreover, Donald Trump’s comments on Taiwanese defence back in July also challenge Asian chipmakers, causing tech stocks to tumble.
Despite these declines, we still find South Korea and Taiwan attractive as underlying fundamentals remain unchanged. Both South Korea and Taiwan are key semiconductor powerhouse, home to chip giants like Samsung, SK Hynix and TSMC. Both economies are also export-oriented with exports driving the majority of their GDP.
Given our bullish view on the Digital Economy, we expect both South Korea and Taiwan to experience economic expansion. Coupled with Samsung, SK Hynix and TSMC being large constituents of their respective market indexes, secular tailwinds benefitting these companies would boost not only the nation’s economy but also its stock market.
For South Korea, semiconductor exports in June 2024 surged by 49.4% YoY to USD 13.4 billion as global demand for AI and EVs continued to grow. The nation’s trade balance also ballooned to USD 8 billion in the same month, marking its biggest since 2020.
Figure 4: South Korea’s semiconductor exports continued to grow
In June 2024, Taiwan’s exports surged 23.5% YoY, exceeding market estimates of 13.4% YoY. This was largely driven by a 32.8% YoY increase in machinery and electrical equipment exports.
Figure 5: Taiwan’s machinery and electrical equipment exports continued to grow
While we acknowledge the potential risk of Donald Trump’s comments on sanctioning Taiwan, we expect TSMC to still play a vital role to US chip and tech giants as it is the main AI chip supplier to global chip developers such as NVIDIA, AMD, Intel, Qualcomm. Hence, it would not be easy to eradicate TSMC entirely from the US semiconductor space.
Moreover, the US has overtaken China as Taiwan’s top export market since December 2023. Exports to the US has also been growing at a much higher pace of 74.2% YoY for the month of June relative to China’s 10.5% YoY. This may be due to China’s move towards being less dependent on Taiwan by developing its capacity to manufacture chip-making equipment.
Figure 6: US overtook China as Taiwan’s top export market
Figure 7: Exports to the US have also been growing more steadily than China
Overall, we remain optimistic about the outlook of the Digital Economy. In addition to their potential for strong earnings growth, which should push share prices up, big tech and chip stocks are arguably among the most attractive in the current economic climate. We also recommend investors to stock up positions in tech-heavy markets like South Korea and Taiwan. We have rated South Korea as 4.0 stars – Very Attractive and Taiwan as 3.5 stars – Attractive, acknowledging that the latter has a higher degree of geopolitical risks.
Table 2: Recommended products for the Digital Economy, South Korea and Taiwan
|
Market |
Product |
|
Digital Economy |
Fidelity Global Technology A-ACC-USD Eastspring Investments Unit Trusts – Global Technology SGD |
|
South Korea |
|
|
Taiwan |
Buy the dip in Japan
The yen appreciation over recent weeks coupled with BoJ’s second rate hike has also raised concerns.
In order to avoid the high interest rates in the US, investors have utilised the approach of yen carry trade, borrowing yen at low interest rates in Japan to fund higher-yielding investments. However, with the latest market developments suggesting for more upcoming rate hikes in Japan, it has lowered the appeal of yen carry trade and triggered unwinding of these carry trades and leading to market selloffs, especially in the US.
On another note, the previously weaker yen supported foreign currency-denominated earnings of Japanese firms, which attracted inflows into Japanese equities. Exporters who previously benefitted from a weaker currency, earn largely in foreign currencies but report in yen, are now facing foreign exchange rate losses.
Moreover, margin bets on Japanese stocks had reached the highest level since 2006 before the selloffs. The latest market development could have triggered margin calls and further driving the selloffs in Japanese equities.
We think that the sharp market decline in Japanese equities is mainly due to the reversal of speculative investments rather than fundamental issues with Japanese firms.
With regards to the strengthening yen, we believe the impact will be outweighed by underlying structural factors driving Japanese equities. These include improvements in corporate governance and Japan's resurgence as a major player in the semiconductor industry, driven by the AI boom. Along with improvements in underlying economic fundamentals, we expect Japan to achieve a strong earnings per share outlook, which should drive long-term growth of the equity market.
As such, we recommend investors to buy Japan after the recent market correction.
Related article: BoJ hikes rates again. Buy the dip in Japan.
Related article: This market’s stock rally is likely far from over
Table 3: Recommended products for Japan
|
Category |
Product |
|
Japan |
|
|
Japan (Small Cap) |
|
|
Japan (Dividend Paying) |
Recession fears overblown
Last but not least, another trigger for the global market sell-off is the weak US labour report for July, which fell short of expectations and raised concerns about a potential recession.
Consumer spending accounts for about 70% of the US economy, making it closely tied to the health of the labour market. In July, employers added just 114,000 jobs, compared to the consensus estimates of 175,000. This number is also the lowest level in three months, below the average monthly gain of 215,000 over the past 12 months. Wage growth also slowed in July with average hourly earnings up 3.6% YoY in July (3.8% YoY in June), marking the weakest annual rate since May 2021. Moreover, the unemployment rate in July spiked up to 4.3%, the highest since October 2021.
Figure 8: US weak labour numbers in July sparked recession fears
Furthermore, geopolitical tensions have heightened after the assassination of top Hamas leader, Ismail Haniyeh. As a result, oil prices are likely to stay elevated, contributing to higher energy inflation and potentially increase global trade costs in the event of supply chain disruptions. This could hinder economic growth and increase risks of a recession.
Despite the weak US July labour report and the rising geopolitical tensions, we expect the US economy to remain resilient. The US labour numbers is more in line with a slowdown rather than a recession. While we recognise that the unemployment rate has been increasing, it is driven not by layoffs (akin to past recessions) but attributed more to an immigration-driven increase in labour supply.
Severe conditions in several Latin American and Caribbean countries have led the US government to broaden humanitarian parole programs. Many migrants look to escape harsh conditions and seek entry to the US under these humanitarian provisions.
Additionally, the availability of jobs and rising wages are significant factors. After the pandemic, the US labour market was tight, with record-high job vacancies in sectors reliant on immigrant labour. Wages in these industries rose faster compared to others. Research has shown that the US labour market conditions have also driven the rise of illegal immigrants.
We believe illegal immigrants have driven strong labour numbers post-pandemic. With President Biden's border security and immigration reduction measures in June 2024, monthly border crossings have slowed. Hence, this may have caused weaker nonfarm payrolls and slower wage growth in recent months.
Based on the latest FOMC Press Conference held on 31 July 2024, the Fed Chair Jerome Powell has also shared that recent data indicates that economic activity has continued to grow steadily. GDP in the US continued to grow at 3.1% YoY in 2Q24, stronger than the previous quarter’s 2.9% YoY.
Private domestic final purchases (PDFP), which excludes inventory investment, government spending, and net exports and often provides a clearer picture of underlying demand, increased by 2.6% YoY for the first half of this year. Although consumer spending has decelerated from last year’s robust rate, it remains solid.
Moreover, the US Conference Board Consumer Confidence, which serves as a leading indicator of consumer spending, came at 100.3 in July, above market estimates of 99.7 and the prior month’s 97.8, signalling potential increases in consumer spending in the coming months.
Figure 9: US economy continued to grow in 2Q24, surpassing the previous quarter’s growth
Overall, we believe the current recession fears are akin to how market was expecting a recession to come at the start of 2023 and yet, it did not actualise. Investors should avoid overreacting to the US weak labour number and consider the bigger picture. With ongoing economic expansion and solid consumer confidence, we expect the US economy to remain resilient.
We recommend investors to focus on quality companies which are more resilient during periods of market volatility.
Table 4: Recommended products for periods of market volatility
|
Market |
Product |
|
US Quality |
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