What are the sectors to invest in for 2023?
The $Nasdaq Composite Index (.IXIC.US)$ was up more than 16% year to date as of Feb. 2, 2023. That's the best start to the year since 1975. So will this year be good for the Nasdaq? I don't think so. This is just a relief rally after tech stocks' rout last year. They have been rallying because the market is pricing in the Fed hiking rates for the last time by 25 basis points, pausing and then cutting rates in the second half of the year.
The reality is that an earnings recession has now begun and that inflation may still pick up later this year. The strong rebound has come despite mixed Q4 earnings and outlooks, in addition to about 100,00 layoffs announced since a few months ago. China's reopening from its zero-Covid will result in greater demand for commodities and hence higher inflation. But China's increased demand for goods and services from the U.S. and EU may also result in a sllghtly shallower recession in these regions. So the Fed may have to hike rates higher for longer. There may not be any rate cuts this year. The markets may crash this year.
China
So which sectors to invest this year? The most obvious one is China after it reopened from the lockdowns in the zero-Covid policy. The MSCI China Index bottomed in Oct 2022 after rumours of it easing restrictions surfaced. These turned out to be true in Dec when it lifted most curbs. The MSCI China Index rose more than 50% from around 47 in Oct 2022 to around 75 in Jan this year.
It's not just about China's reopening from 3 years of Covid-19 lockdowns. China also started cracking down on tech stocks and other sectors 2 years ago in the name of "common prosperity". This aims to take the wealth from top management and distribute it more equally with those at the bottom. All these culminated in a staggering 60.7% drop in the benchmark $NASDAQ Golden Dragon China (.HXC.US)$ from its record high of Feb 19, 2021. The U.S had passed a law in Dec 2020 requiring Chinese companies listed in the US to open their books to audit watchdogs. If they failed to comply with the requirements for 3 straight years, they would be delisted. This threat seems to be averted when China finally agreed in Aug 2022 to let US officials inspect the audit work of these firms. In Nov 2022, Chinese authorities were reported to be poised to impose a fine of more than USD1 b on Alibaba's Ant Group, settling the stage of the end of the crackdowns and regulatory overhauls.
The U.S. imposed tariffs on some Chinese products and banned the sale of high end chips to China. All these and its beleaguered property sector resulted in the Chinese market plunging.
With China's reopening's and the problems close to being resolved, its economy and stock market are set to benefit greatly. Several stocks' prices have increased by more than 100% since the Oct lows. China's GDP grew by 3% in 2022, the slowest since 1976. But it's forecasted to grow by 5.5% this year.
China is in a different cycle to the U.S. The U.S. has inflation at a 40-year high and has to hike rates to tame it. On the other hand, China's inflation is only about half and it can afford cut rates, inject cash into the financial system and impose fiscal stimulus to stimulate consumption and the economy. While the U.S. may be entering a recession, China may be entering a bull market.
China will not let up on focusing on the economy and the MSCI China could enjoy a further upside despite rallying more than 50%. Chinese stocks are believed to be poised for recovery in 2023, although initially at a much slower pace than pre-pandemic levels.
The market has fallen to a low valuation and is attractive. Excluding A-shares, 61% of MSCI China by weight are still priced below pre-Covid levels. On price-to-earnings and price-to-book multiples, more than 80% of the stocks are below that level. Almost 76% of China's "common prosperity" stocks are still priced below pre-Covid levels. The tech stocks are attractive. Even the property stocks are recovering.
The MSCI China Index is trading at 10.9x forward price-to-earnings ratio, below the 10-year average of 11.2x. Even better earnings growth can be expected.
The stocks to buy include $Tencent (TCEHY.US)$ , $Alibaba (BABA.US)$ $JD.com (JD.US)$ , $PDD Holdings (PDD.US)$ $Baidu (BIDU.US)$ $MEITUAN-W (03690.HK)$ and $BYD Co. (BYDDF.US)$ .
Hong Kong
Like China, Hong Kong had a zero-Covid policy and was also in lockdown for 3 years. The $Hang Seng Index (800000.HK)$ suffered greatly and fell to a 13-year low.
The sector to buy are the China stocks listed in Hong Kong. It has the highest returns. Hong Kong's GDP contracted by 3.5% in 2022. But it's forecasted to grow by 6.5% this year.
Artificial Intelligence (AI)
With the hype over ChatGPT, AI stocks are the rage right now with stock prices surging. Figs. 3 and shows the American AI stocks and their performances.
Fig. 5 shows the China AI stocks outperformed CSI 300 year-to-date as at Feb. 1, 2023.
Shares of $Beijing Haitian Ruisheng Science Technology Ltd. (688787.SH)$ rose about 205% year-to-date. $Hanwang Technology (002362.SZ)$ is up 124% and $Cloudwalk Group (688327.SH)$ rose 105% as at Feb 8, 2023.
AI is the future, so their shares will rise. But they will be volatile. So only buy those that are profitable.
Some words of caution. The technology is still relatively young. Today's leaders may not necessarily be the leaders in the future, and further discoveries in the field can lead to fortunes changing wildly. There will be some AI failures.
AI stock prices may run up far ahead of its time and form a bubble similar to the meme and dot-com bubbles. Be sure to take your profit. Because when the bubble burst, it may also take down tech and other stocks.
Commodities
Commodities look to be outperformers in 2023, with a perfect macroeconomic environment and critically low inventories for almost every key raw material, Goldman Sachs head of commodities reasearch said.
China has reopened its economy from the zero-COVID policy. Demand in starting to rebound and there's insufficient investment in supply, meaning the year will be bullish for prices of commodities.
"Lack of supply is apparent in every single market you look at, whether it is inventories at critical operating levels or production capacity exhausted," Jeff Currie said.
As China's economy improves, the demand for metals increases as they are needed for the manufacturing and property sectors.
Copper prices started off the year with a bang. The Copper Monthly Metal Index (MMI) rose 9.19% from Jan to Feb. Global copper manufacturing has declined, which could help bolster prices as economic conditions are expected to improve in the coming months. Currently, the trend is up, and prices are expected to continue rising.
But the global manufacturing health is still weak and markets wish to wait and see for evidence of returned Chinese demand before pushing copper prices up another leg.
Goldman raised its price forecasts for aluminum, saying higher demand in Europe and China could lead to supply shortages. The bank predicted a multiyear commodities supercycle in late 2020 as years of under-investment prevent supply from keeping pace with demand.
Oil has been capped by recession fears in the EU and US, and China's shaky reopening of its economy. Traders are also tracking the impact of sanctions on Russian oil. For 2022, Brent gained about 10%, after jumping 50% in 2021. WTI crude rose nearly 7% in 2022, following the previous year's gain of 55%. Both benchmarks fell sharply in 2020 as the COVID-19 pandemic slashed fuel demand. They are set to rise for the third straight year.
Natural gas prices in Europe dropped to the lowest since Sep 2021, as liquefied natural gas continued to flood into the continent due to lack of competition from China, where stockpiles of the fuel are full.
This could all change later in the year if a robust recovery in Chinese demand combines with the end of interest-rate hikes in major Western economies, Currie said.
Currie sees parallels with the record run-up in commodities prices from 2007 to 2008. The only exception, he said, is European natural gas, where inventories look sufficient to get through this year.
During Jan 2007 to Jul 2008, The Fed took their foot off the brake, China put the pedal to the metal and Europe started to grow quickly, and oil prices rose by USD100, he said.
Gold price is set to rise as the Fed ease the hiking of rates on inflation falling from 40-year highs.
$Bitcoin (BTC.CC)$ $S&P 500 Index (.SPX.US)$ $Dow Jones Industrial Average (.DJI.US)$ $Invesco QQQ Trust (QQQ.US)$ $CSI 300 Index (000300.SH)$ $TENCENT (00700.HK)$ $BABA-W (09988.HK)$ $BIDU-SW (09888.HK)$ $BYD COMPANY (01211.HK)$ $JD-SW (09618.HK)$ $BigBear.ai Holdings (BBAI.US)$ $C3.ai (AI.US)$ $SoundHound AI (SOUN.US)$ $Rigetti Computing (RGTI.US)$ $Quantum Computing (QUBT.US)$ $IonQ Inc (IONQ.US)$ $NVIDIA (NVDA.US)$ $Advanced Micro Devices (AMD.US)$ $Alphabet-C (GOOG.US)$ $Microsoft (MSFT.US)$ $Tesla (TSLA.US)$ $Ford Motor (F.US)$ $Chevron (CVX.US)$ $Apple (AAPL.US)$ $Rex Intl (5WH.SG)$ $RH PetroGas (T13.SG)$ $AEM SGD (AWX.SG)$ $Geo Energy Res (RE4.SG)$ $Golden Energy (AUE.SG)$
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MonkeyGee : with economic turmoil is follow by WAR buy PLTR the hottest war stock!
Scorched earf : Definitely AI. It is a hot sector. IVDA to save you some time
bullrider_21 OP : Thanks for some examples of AI stocks.
bullrider_21 OP : Added some words of caution.
bullrider_21 OP : Iron ore has jumped 65% since hitting its 2022 low of USD79 a tonne on Oct 31. Iron ore tends to be one of the first commodities to respond to optimism over China's outlook.
bullrider_21 OP : Investors are piling into China's tech, media and telecom (TMT) shares, with speculative bets on chatbot development crowding out other sectors.
Mainland China computer, communications equipment and media indexes have surged between 29% and 35% this year, outstripping a rise of just 3.5% in the benchmark CSI 300 Index.
But as FOMO kicks in to extend the rally to new heights, analysts worry gains can turn unstable, and there are already some signs it is distorting markets.
"In the stock market, AI will be an epic opportunity," said Niu Chunbao, a fund manager at Wanji Asset Management who worried he was missing the rally and bought AI stocks in recent weeks.
Data compiled by Cinda Securities showed ETFs are getting cash, too, with TMT-focused funds drawing net inflows of 4 b yuan (R2.5 b) over the past 3 months, among the largest such buying in any sector.
The siphon effect of the TMT sector has become increasingly obvious," said Guosheng Securities analysts, while others pointed to fundamentals that appear shaky.
An eye-catching tripling in the price of chipmaker Cambricon Technology Corp has driven its market value above US$10 b, despite the company reporting losses since 2017.
Beijing Haitian Ruisheng Science Technology’s shares have quadrupled, even as the AI training data provider cautioned investors it did not see substantial order growth brought by artificial intelligence-generated content (AIGC).
The AIGC trade is obviously overheated," said Yao Pei, chief strategist at Hua Chuang Securities.
Still, with China's government supportive of technology development, some think winners will eventually emerge, even if there is a washout in the market first.
"Most companies that surged in the frenzy are junk stocks, which lack long-term value, and the investments are merely Ponzi schemes," said Yuan Yuwei, fund manager at Water Wisdom Asset Management.
"The junk shares will certainly slump, then we will see real industry leaders emerge."