Markets may be ready to lift off again
Abraham George Market Views
Since the March 2020 crash, we had the worst month in stock markets last month. The S&P 500 which is a proxy for all markets dropped about 6% but the tech-heavy Nasdaq fell 10 % and the S&P Biotech ETF fell almost 19%. Cathie Wood’s many innovative and new technology funds had much bigger falls. Even the crypto market cap suffered big falls which should not be a surprise to anyone now, to the tune of over 30% during the January selling. Many readers and participants are concerned that we could be on the cusp of a bigger crash.
However, I think there are reasons to be optimistic. Markets have been preparing for the announcement from the Fed since November. The Fed has said they may raise rates up to four times and will taper the asset-buying by March this year. They could be also making their first rate hike for a long time in March.
I reckon many index-following fund managers (they are huge) are sitting on the sidelines expecting further falls. If that doesn’t happen, they are forced to return to index levels or higher. Those managers are all measured against the index and they don’t have much luxury of a big tracking error. With technology and digital themes taking such a lead in economic growth, the semiconductor industry has become a strong measure of future growth. All semiconductor manufacturing companies are in a race to increase their capacity. Taiwan Semiconductor Manufacturing Company (TSMC) the largest in the world increased its capacity by 47% this year. That wouldn’t be happening if there wasn’t broad consumer demand.
There is no doubt that we have real inflation but the Fed won’t be willing to significantly raise rates. With the November mid-term elections, the Fed and the government will play a slightly different game by taking the punch out of the markets by giving the perception of much bigger hikes. But when it comes to actually hiking the rates, don’t be surprised if we get only two hikes this year. Some of the high-flying stocks with 80 to 100 times sales are still feeling the heat; they may continue to come lower. It is time one looked for value in some of the leading stocks. In the last report, we talked about Meta or Facebook.
Yesterday, it closed below the pre-pandemic level. In just five days the stock is down 34%. Facebook’s fall did not happen only because of the rising interest rate environment but had a string of other issues which we discussed in the last letter. Just a few months ago, it garnered a trillion-dollar valuation and is still part of the big tech oligopoly. For 2021, it grew revenues by 37% and operating income by 42% (year-over-year).
Facebook was trading north of 25 x earnings before Jay Powell pivoted on the inflation outlook. With yesterday’s prices, it is trading at 16 times. This has been the cheapest valuation on Facebook since it became a public company. 16 is also the long-term broader market multiple. Looks like we still have a growth company with an entrenched market position with over 40% operating margins at a long-term average broad market multiple. Don’t you think it is worth a buy?
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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and multi-billion dollar portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund. Currently, he is a co-founder of a new hedge fund where foreign citizens can invest in Indian growth stocks like Tanla operating in hyper-growth markets like CPaaS.