Investment Newsletter – May 2024
For U.S. stock markets, CCB International believes that “Scenario 1″ is the most likely scenario, where few large stocks continue to be highly concentrated. These stocks are the pioneers of internal changes within AIGC, but the composition of this leading alliance may undergo reshuffling. CCB International has three reasons to believe that the “Scenario 1” of tech giants will occur. First, similar market shifts have been seen before, from FAANG (Facebook, Amazon, Apple, Netflix, and Google) to GAMMA (Google, Amazon, Microsoft, Meta, and Apple), and now to the “Seven Giants.” The media has already been brewing the concept of the Fab Four (Nvidia, Amazon, Meta, and Microsoft). Second, the high cost of innovation, which has risen sharply over time, creates entry barriers that make it unlikely for new players to enter the game. Lastly, several catalysts have contributed to this situation, including the increasing belief in the “higher rates for longer” monetary policy and technological breakthroughs like ChatGPT and SORA making headlines.
Although the phrase “this time is different” can be dangerous and costly, CCB International believes that this time might indeed be different. Despite the market’s concentration in the “Seven Giants,” CCB International believes that the solid financial conditions and ample cash flow of tech giants, along with the possibility of the U.S. shifting to a looser monetary policy, may lead the market down a different path, avoiding a bubble burst. It is expected that the U.S. stock market will form a U-shaped trend in 2024. Other recent downside catalysts include potential geopolitical conflict escalation, uncertainty during the U.S. election season, and downside surprises in earnings season.
Currently, the global economic recovery is sluggish, with frequent regional conflicts and unrest. Unilateralism and protectionism are on the rise. Some countries or regions have begun to build trade barriers through tightening regulations to protect their domestic industries. This is manifested in mandatory decoupling and supply chain disruptions or the imposition of various forms of tariffs. In the short term, this wave of anti- globalization has negatively impacted related industries in China to some extent, bringing challenges to the operation and development of enterprises. However, from a long-term perspective, the wave of anti- globalization has also accelerated the timely resolution of deep-seated issues in China’s economic development process, providing an opportunity to reassess and adjust the economic structure.
Regarding mandatory decoupling and supply chain disruptions, on the one hand, it has stimulated a sense of urgency for independent innovation in China to some extent. It has become a key factor in enhancing independent innovation capabilities. Under the pressure of the external environment, China is placing greater emphasis on independent research and development, accelerating technological breakthroughs, and striving to build an independent and controllable technological system. On the other hand, it has also promoted further opening and deepening of the domestic market, accelerating the pace of Chinese enterprises going global. In the face of international market uncertainties, Chinese enterprises are more actively exploring overseas markets through mergers, acquisitions, joint ventures, and other means to achieve global resource allocation.
The U.S. yield curve inversion reached a significant milestone, becoming the longest duration since 1920. Historically, the yield curve has accurately predicted 9 out of the last 10 US recessions over the past 70 years. However, this time it has not followed the same pattern due to several factors, including excess global liquidity, market QE/YCC influences, extended monetary lags from fixed-rate mortgages and refinanced corporate debt, and over-capitalized banks due to regulation. Despite the current state, the yield curve inversion is gradually becoming less pronounced. Historical trends suggest that the lag in response is only temporary. If macroeconomic conditions reveal that the Federal Reserve is “behind-the-curve” and needs to implement sharp rate cuts, the yield curve will steepen quickly. Every 2s10s steepening cycle has historically led to a credit bear market. Investors should be aware that a suddenly steeper yield curve, along with weaker bank and PE stocks, serves as early warning signs. These indicators are crucial for anticipating potential market downturns and adjusting investment strategies accordingly.
