Investment Strategy: Rally Continuation or Reversal of Fortunes? My perspective on 1H 2023 and Forecast into 2H 2023
Investment Strategy Note for Members: A look into the 2H of 2023
Admin Note: Going forward in our Investment Community, I will produce 1 premium weekly strategy note to Members and 1 weekly dashboard excel update with the key levels on the companies I watch closely. These updates will be sent on the weekends on either Saturday or Sunday.
Long time members from 2022 know that my previous publication schedule was on a Bi-Weekly frequency. With Weekly updates, Members now will receive 4 Strategy updates per month, which is double the content at no change in subscription cost.
Out of these 4 updates each month, one of them will be a dedicated DCF Analysis of a company in my focus list that most investors typically follow/care about. This is a new feature that I haven’t done previously earlier in 2023, but this will add significant value to our Community.
This allows me to set the publication schedule to be clear and standardized.
At some point later this year, I will create a separate Trading Community designed for more serious, advanced market participants. Today’s Community format is Investments-oriented and designed for all types of skill levels.
All active paid members will receive special and preferred pricing once released.
Members,
I hope you all have a wonderful July 4th holiday with friends and family. Let’s have a good start to the 2nd half of the year.
In this note, I’m going to provide a brief recap into market action from a global perspective in the 1H of 2023 and and then discuss some preliminary views of themes I’ll be watching in 2H of 2023.
The recap is going to be oriented around my watchlist of companies and themes which I follow and transact in. The recap is based on how I see the market. Your view may of course be different.
A Very Brief Recap of 1H 2023 (From my point of view)
2023 started with the January Effect in play, a phenomenon that makes January a seasonally stronger part of the year.
With December 2022 being a very difficult month for stocks, the market looked to seasonality for an optimistic view to reset the tone.
2023 started off strong immediately in many sectors - most notably tech, cyclicals, and high-beta themes such as China internet. The China internet sector saw a stunning 25% bounce in the first 2 weeks of January on renewed hopes of the Covid reopening to spur growth and consumption. China became a much more challenging environment after January as consumer and real estate data proved that a sustained recovery was still elusive.
In the earnings quarters of Q1 and Q2, we saw the Mega Caps largely continue their plans for share buybacks and “cost optimization” (a term for continued layoffs). The Street most likely hiked their EBITDA forecasts heading into 2024 and this made valuations more compelling for Fund Managers who were looking to add companies that grew faster than the U.S. Economy in terms of GDP. As a basket, Growth as measured by the VUG Vanguard Growth ETF has significantly outperformed Value as measured by the VTV Vanguard Value ETF so far this year.
The accelerating catalyst for technology was continued discussion on ChatGPT and A.I.’s prominence in the future of work - both in terms of productivity and impact on profitability. The largest components inside the U.S. indices were also the beneficiaries of the A.I. hype cycle, and NVDA’s latest quarter crystalized the potential of artificial intelligence.
The entire semiconductor ecosystem, as well as companies with secondary degree affiliations with A.I., all benefited from the upbeat forecasts of the sector.
With Analysts now raising revenue, EBITDA, margins, and EPS estimates for the semiconductor space, the Street repriced the stocks to reflect higher (lofty) estimates.
On the other side of the globe earlier in 2023, we saw a divergence of data where European Cyclicals in the German DAX and France CAC 40 started rebounding on growth optimism despite mixed data. Many European indices reached all-time highs in 2023 as the Euro rebounded sharply against the dollar.
In currency action, the Japanese Yen continued to weaken (much to my dismay) as the Bank of Japan’s new Governor Ueda continually reiterated a more dovish stance on the country’s QE policies until inflation rebounded to its 2% target. Capitalizing on this, institutional traders who employ the Carry Trade to borrow currencies from low-interest rate regions to invest in currencies from higher-interest regions took advantage of the Yen’s continued weakness to redeploy capital into the USD and higher yielding EM Currencies.
The Japanese Stock Market rallied to multi-decade highs, but its weak currency means that only local investors stand to benefit. Foreign investors who experience Japanese equity upside may see their capital gains offset by the depreciating currency.
In China, an uneven recovery in consumer and real estate data has made the China Internet sector experience lumpy and erratic price action. The Chinese Yuan has weakened against the Dollar to now trade north of 7.2, which may be a PBOC strategy to attract more foreign direct investment (FDI).
For the first quarter of the year, U.S. stocks stayed mostly subdued from January to March until the SVB banking crisis. The SVB crisis then sparked a temporary end to the QT plans the Fed has been enacting. Fast forward 2 months, markets climbed the wall of worry into the Debt Ceiling debate as Biden and McCarthy agreed to raise the debt ceiling for the next 2 years.
While the U.S. economy in terms of real estate, consumer spending & savings, and business capital expenditure continues to remain uneven, these adverse macro factors were overwhelmed by one large factor: Investor Positioning.
With a record number of market participants betting against stocks in an attempt to profit from a highly anticipated equity market decline, the market disallowed the short-sellers from benefiting as one development after another gave traders a reason to push markets higher and squeeze the shorts.
As we stand here today with the 1st half over, the S&P 500 is up around 15% and the Nasdaq is up around 30%.
Below, we will discuss some initial expectations and forecasts that I have on multiple themes such as S&P 500, Nasdaq, Semiconductors, TLT ETF (Treasuries), China, and Gold for the second half of this year.
Let’s get into it.