2022 which sectors to buy or avoid
1. High growth tech stocks have taken a beating like never before. Compared to the last correction in Feb-Mar 2021, this correction that started in Nov 2021 is deeper than that. Momentum has suggested these trends have been broken and momentum is now on the other direction. $ARK Innovation ETF(ARKK.US$ ARK Innovation ETF, as a representative of high growth tech stocks, is down 16% in the last one month while Energy Select SPDR ETF gained 6% in the same period.
2. This is likely due to the interest rate increment that is looming and growth stocks' reliance on future value will be worth much less today. On the other hand traditional sectors such as energy, industrials and materials are coming up as they benefit from rising prices.
3. The Fed has threatened to raise interest rates in the last 13 years but never really got to it because inflation hasn't been a threat until now. The days of easy money is over and that means it will be a major reset to the entire US stock valuations.
4. Let's take the pre-2008 massive money printing exercise as a period to determine what the interest rate could look like. It ranged between 1% to 5%. Taking 3% as the middle ground, it will be a 12x increase from the current 0.25%. The change is going to be significant.
5. Nobody can pinpoint with certainty what the new fair valuation for the high growth stocks would be. But let's roughly guess. Assuming the new base is around the 2015 period where the EV/NTM for high growth tech stocks was around 10x. We currently have $Snowflake(SNOW.US$ SNOW at 49x, $Cloudflare(NET.US$ NET at 40x, $Zscaler(ZS.US$ ZS at 32x. For e.g., if ZS falls to 10x multiple, it would see its share price drop another 69%, even if ZS continue grow its revenue fast. We are talking about a massive rebasing and nothing to do with the business fundamentals which can continue to be good.
6. Next, I would do some predictions on what investments could do well or worse in this new interest rate environment.
7. $SPDR S&P 500 ETF(SPY.US$ S&P 500 will do well because the big tech are resilient. Their values are not derived from future growth as they are already profitable today. They behave more like consumer staples where we can't live without them on a daily basis. S&P 500 has industrials, commodities, materials, consumer staples and financials which help push up the index as these sectors benefit from rising prices.
8. NASDAQ could be beaten by S&P 500 again in 2022 because of its focus on growth stocks predominantly. But it would not fair that badly considering the major components are profitable big tech which are resilient to interest rate rise.
9. China could see a rebound this year especially the A shares are heavy on commodities, industrials, financials and consumer staples. $Alibaba(BABA.US$ Alibaba should do well too because after the heavy beating, it has become a value stock more than a growth stock. $TENCENT(00700.HK$ Tencent should be resilient as with the big tech in US. But the money-losing Chinese tech stocks such as $KUAISHOU-W(01024.HK$ Kuaishou will continue to do badly.
10. Hong Kong has a lot of financial and real estate stocks. Although they should benefit in the new interest rate environment, I am not so positive because Hong Kong is on a structural change. Finance stocks like banks and insurance should do better but not the real estate ones, given that the Chinese government is more keen to make housing affordable.
11. Singapore is likely to prosper. We just saw $DBS Group Holdings(D05.SG$ DBS breaking new high. $30 is expensive? Now it is $34! It broke a major psychological price point. STI is dominated by the 3 banks with almost 50% weightage in the index and rising interest rates mean higher net interest margin for them. So they will push the STI to higher figures. REITs on the other hand would not do that well but won't fare too badly given the cushion from the dividend distributions. Just a rather muted year, same as 2021.
12. Value might make a comeback after so many years. We may start to see selected small cap value stocks running sporadically.
13. The investment clock probably tells us that we are out of the growth zone and into the inflation zone. After the inflation zone? Recession zone.
2. This is likely due to the interest rate increment that is looming and growth stocks' reliance on future value will be worth much less today. On the other hand traditional sectors such as energy, industrials and materials are coming up as they benefit from rising prices.
3. The Fed has threatened to raise interest rates in the last 13 years but never really got to it because inflation hasn't been a threat until now. The days of easy money is over and that means it will be a major reset to the entire US stock valuations.
4. Let's take the pre-2008 massive money printing exercise as a period to determine what the interest rate could look like. It ranged between 1% to 5%. Taking 3% as the middle ground, it will be a 12x increase from the current 0.25%. The change is going to be significant.
5. Nobody can pinpoint with certainty what the new fair valuation for the high growth stocks would be. But let's roughly guess. Assuming the new base is around the 2015 period where the EV/NTM for high growth tech stocks was around 10x. We currently have $Snowflake(SNOW.US$ SNOW at 49x, $Cloudflare(NET.US$ NET at 40x, $Zscaler(ZS.US$ ZS at 32x. For e.g., if ZS falls to 10x multiple, it would see its share price drop another 69%, even if ZS continue grow its revenue fast. We are talking about a massive rebasing and nothing to do with the business fundamentals which can continue to be good.
6. Next, I would do some predictions on what investments could do well or worse in this new interest rate environment.
7. $SPDR S&P 500 ETF(SPY.US$ S&P 500 will do well because the big tech are resilient. Their values are not derived from future growth as they are already profitable today. They behave more like consumer staples where we can't live without them on a daily basis. S&P 500 has industrials, commodities, materials, consumer staples and financials which help push up the index as these sectors benefit from rising prices.
8. NASDAQ could be beaten by S&P 500 again in 2022 because of its focus on growth stocks predominantly. But it would not fair that badly considering the major components are profitable big tech which are resilient to interest rate rise.
9. China could see a rebound this year especially the A shares are heavy on commodities, industrials, financials and consumer staples. $Alibaba(BABA.US$ Alibaba should do well too because after the heavy beating, it has become a value stock more than a growth stock. $TENCENT(00700.HK$ Tencent should be resilient as with the big tech in US. But the money-losing Chinese tech stocks such as $KUAISHOU-W(01024.HK$ Kuaishou will continue to do badly.
10. Hong Kong has a lot of financial and real estate stocks. Although they should benefit in the new interest rate environment, I am not so positive because Hong Kong is on a structural change. Finance stocks like banks and insurance should do better but not the real estate ones, given that the Chinese government is more keen to make housing affordable.
11. Singapore is likely to prosper. We just saw $DBS Group Holdings(D05.SG$ DBS breaking new high. $30 is expensive? Now it is $34! It broke a major psychological price point. STI is dominated by the 3 banks with almost 50% weightage in the index and rising interest rates mean higher net interest margin for them. So they will push the STI to higher figures. REITs on the other hand would not do that well but won't fare too badly given the cushion from the dividend distributions. Just a rather muted year, same as 2021.
12. Value might make a comeback after so many years. We may start to see selected small cap value stocks running sporadically.
13. The investment clock probably tells us that we are out of the growth zone and into the inflation zone. After the inflation zone? Recession zone.
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Advancedlong : Valuations for american tech stocks were ridiculous. Theres growth but not so much as to trade at 100x price to sales. China is undervalue in my opinion. Profitable dividend stocks are doing well.
Lexyko : Wow then should I continue to hold my US tech stocks, DCA it or what