Musings and Opportunity in Chinese Tech Stocks

Musings today:  Forward return potentials for the SPX based on normalized PE ratios, US stagflation and top performers in this environment, Canada’s woes continue, and a very interesting opportunity in Chinese tech stocks. Read on!

 

The above chart suggests that the “Magnificent Seven (Meta, Apple, Microsoft, Google x 2, Tesla, Nvidia) should have a 10 year average return from here in the negatives. It suggests that, were the Mag 7 to remain at the current capitalization within the S&P 500 index, that index should average very low single digit returns for the coming decade. This ties into my “Sideways” thesis I’ve been harping about since early 2022.

Finally, if you look at the S&P 500 ex-Mag 7, you might expect returns to average closer to the long termed averages of 8% or thereabouts.

Lesson: Buy n’ hold index investors (ETF’s, large caps, etc.) of cap-weighted indices might look forward to making very little average returns. However, all is not lost for the US market, so long as you avoid the overbought, overhyped, overvalued sectors. Or, trade the market’s swings in the SPX. I’ll keep hammering this message!

From the Fed this week

The Fed may stop raising, but inflation is higher than they had projected. Projections have changed from 3% – now higher to 3.5% at year end. This suggests easing is still a ways away. Meanwhile, recession looms. Stagflation! I’ve been harping on that theme for a year now. Broken record, I know. But I don’t want you to lose sight of this in a world of media and sell-side research propaganda. Key takeaways from the meeting (BearTraps research):

*MOST FED OFFICIALS SAW UPSIDE RISKS TO INFLATION
*MANY FED OFFICIALS SAW DOWNSIDE RISKS TO GROWTH

What does upside inflation risk + downside growth risk mean? You know the answer – I’ve given it to about 50 times this year….

Stagflation!

Final takeaways:

*ALL PARTICIPANTS JUDGED IT APPROPRIATE TO MAINTAIN THE TARGET INTEREST RATE AT 5.25%-5.50%.
*PARTICIPANTS NOTED THERE HAD BEEN ONLY LIMITED PROGRESS IN BRINGING DOWN CORE SERVICES EX HOUSING INFLATION.

 

Stagflation Strategy

Inflation Helps Non-EV Metals and Uranium

In 2023:

Uranium +62%
Gold +15%
Silver +14%
Tin +9%
Lead +8%
Copper +6%
Aluminum -6%
Molybdenum -11%
Zinc -13%
Cobalt -31%
Nickel -32%
Lithium -77%

So much for EV’s!!

If the Fed is in fact done raising, these metals will likely move higher.

Of note: Yesterday I recorded a video on an 8-year cyclical pattern for gold. It will be out next week. Watch for it. I took a study conducted by Jap Kaeppel on a gold cycle, and illustrated an interesting trading opportunity with some of my own charts.  Subscribe to the video’s here. 

Canada’s woes getting deeper

I’ve noted lately that the TSX will likely continue to underperform. The chart pattern is inarguable. Its been through 2 long consolidation patterns since 2017, up a fraction of the gains seen in other developed markets.

Quote from Spencer Fernando, political columnist on Canada’s fall economic statement:

“When Freeland bragged about how affordable our debt was (in 2020), Canada’s debt servicing costs were just above $20 billion per year.  This year, it will cost $46.5 billion to service that debt.  That increase of $26.5 billion is almost the same as what we spend on our entire national defense. The cost of servicing the debt is set to grow even more, reaching about $61 billion per year in five years.

We will be paying for this long after the Liberals are out of power, and it will constrain the next federal government in some serious ways.

And – unlike a country like the United States where at least their economy is rapidly gaining in terms of productivity – we are not growing our way out of this debt. 

We are already in a per capita GDP recession, with GDP growth lagging far behind population growth. Each Canadian is thus getting much poorer on average, which makes the burden of our surging debt costs even more difficult to manage.

There is no easy way out of this. We can’t spend our way out, because that will only increase the debt, increase inflation, and increase debt servicing costs. We can’t tax our way out, because that will reduce productivity and further hamper growth, and we need growth to reduce the relative burden of our debt.  And so, we must come to the conclusion that what is needed is a wholesale rejection of the Liberal approach to fiscal policy.”

Contrarian play: Opportunity in Chinese Tech Stocks

We like international markets & emerging markets here. The USD chart (see my recent videos) suggests about a 4% decline from here vs. world currencies. This bodes well for corporate earnings in these markets.

ValueTrend has been slowly stepping into Chinese stocks, amongst other international markets. Valuations are super cheap, especially on tech when compared to USA leaders. Sure, there are risks, but there are return potentials if things turn around in US/China agreements. It’s a higher risk, higher return play to be sure. Here are a couple of charts to ponder on. We see pretty clear trading patterns on some of the Chinese leaders, including where one might sell if things go wrong. Opportunity approaching?

Here’s a China ETF. Weekly momentum showing early signs of a hook up. Long termed support holding.

Do you see the opportunity in Chinese Tech Stocks from this China Fund chart?

This chart of BIDU goes back to 2007. Super long termed support is holding within a sideways pattern since 2010. We don’t hold this stock at this point, but we are considering it.

This is BABA’s chart. We hold positions in this stock. Right angled triangle consolidation with longer termed support at about $75 holding out so far. First target to the trendline at $100, with a stop below $75.

 

Technical Analysis 101 webinar tomorrow 7:00pm EST

Don’t forget to tell your friends about my upcoming Technical Analysis 101 webinar. Suitable for all levels of investors. Even you old dogs!

Canadian MoneySaver Events – Canadian MoneySaver

2 Comments

  • I disagree with those approaching investing as a casino, not unlike the Klondike Gold Rush..only this time in the FANGLE stocks.

    I agree with your article…cautious, modest investing, in stocks other than the FANGLE. At the end of the day, you can judge the financial outlook and status of a company by its dividend … if it’s broke or very junior, it has nothing to offer in terms of returns. I don’t know how much Ali Baba, Baidu or Chinese companies are doing on that front.

    Reply
    • Thanks Mike. Yes, we are risk adverse managers, and I preach that gospel on this blog. Having said that, I do like small pieces of contrarian plays. We’ve had a history of many of these plays working out (contrarian) – eg oil in 2021, Uranium in 2022, gold this year, etc. I think its a case of proportion, aka how much you take of those contrarian moves. Of note, we did go pretty big in oil back in 2021 (20%) and it worked out well, as we were extremely confident on that one. Not as confident with China, but its still worth consideration. From a value perspective, some of the Chinese tech’s are interesting, and they are toying with support right now. Would I put 10% into those stocks? Heck no! But 3-5%, yes. Keeping the rest, as you note, in stable plays.

      Reply

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