Global Stock Market Opportunities in H2 2021: A Chat With Say Boon Lim
Author: Tim Phillips
August 24, 2021
Investors have had an eventful first half of 2021. From the ongoing China crackdown on its technology giants to the prevalence of a new Delta variant of Covid-19, global stock markets have definitely kept investors on their toes.
Last week, I hosted a fascinating investment panel – as part of CGS-CIMB’s “Driven to Learn” webinar series – that focused on the US Market Outlook for the second half of 2021.
That saw our esteemed panel of Bertram Lai (Group Head of Research and Head of ESG), Jeremy Ng (Market Strategist & Analyst) and Say Boon Lim (Chief Investment Strategist) answer previous questions on everything ranging from US tech stocks to China’s anti-trust action.
Unfortunately, there was only limited time but I managed to catch up with Say Boon Lim after the event to get his in-depth thoughts on some key questions from our audience that we didn’t manage to address.
1. On the U.S. and its ever-growing debt: How are they dealing with it and will we be expecting them to default?
It is true that US government debt to GDP hit its highest level of 136% last year because of pandemic stimulus spending.
But default is very unlikely. Japan had been running a government debt-to-GDP ratio of around 200% for many years and that figure is now around 225%. Yet, it hasn’t gone bankrupt.
Japan, like the US, borrows in its own currency. And when you borrow in your own currency, the central bank can print more of that currency to buy the government bonds issued in that same currency.
That ends up putting more money into the hands of the national treasury to pay the interest on those borrowings.
Ergo, by buying government bonds, the central bank suppresses the yields on those bonds. So, they suppress the cost of government borrowings.
To me, at least, it seems the US strategy for dealing with that “ever-growing debt” is to print money to buy government debt and to suppress the cost of borrowings.
Effective debt management requires the cost of borrowings to be less than the nominal GDP growth rate.
And if in the process of suppressing government bond yields, the US Dollar weakens in the long run, that’s fine. That’s also part of the strategy.
A weaker US Dollar over time is de facto debt default by eroding the real value of that debt. Don’t worry too much about the debt ceiling, though.
US lawmakers won’t allow political showmanship to cause a US debt default.
2. Given the current volatility in China, with the government clamping down on tech companies and the ongoing Covid-19 situation, should we be focusing more on growth or value stocks in H2 2021?
China equities volatility will have very little impact on US stocks. The correlations between US and Chinese stocks are low and sometimes even negative.
The Covid-19 situation will be more important. The rapid spread of the Delta variant could cause US stocks to rotate back to tech as a “pandemic play”.
That would be very much similar to how tech outperformed during the first phase of the pandemic, from March of last year to the announcement of the Pfizer vaccine in November of last year.
Since November until recently, we saw financials, industrials and energy outperforming tech.
But I see the possibility that tech will outperform again, until we get more clarity on the spread of Delta, the effectiveness of vaccines, and more vaccination around the world.
3. What’s your outlook on the higher growth names, specifically in “Cathie Wood” sectors such as cloud, AI, 5G, robotics, and genomics?
Let me cast this more generally. The themes of the future – whether it’s cloud computing, electric vehicles (EVs) or even plant-based food – are long-term plays.
Investors who want to invest in the future have got be prepared to be in it for the long term. Some may do really well too in the here and now.
But do take note that a lot of this will be sentiment-driven. There aren’t a lot of earnings, if any at all, in the present for many of these themes.
In cloud, the better way to play this theme is through Big Tech – Microsoft Corporation (NASDAQ: MSFT), Alphabet Holdings Inc (NASDAQ: GOOGL) and Amazon.com Inc (NASDAQ: AMZN).
Mind you, these are not cheap but they have decent earnings and clearer growth paths. Pure-play cloud is more speculative.
For example, Salesforce.com Inc (NYSE: CRM) has a 58x forward price-to-earnings (PE) ratio while its price-to-earnings-growth (PEG) ratio is 6.3x; ServiceNow Inc (NYSE: NOW) is 80x forward PE (PEG of 4.1x), and Shopify Inc (NYSE: SHOP) is 231x forward PE (PEG of 7.6x).
Similarly, a possibly more conservative way to play AI is through big tech companies with AI-exposures. The best example is Amazon, which also gives you cloud computing exposure.
But if you look at pure-play AI company c3.AI Inc (NYSE: AI), it’s a loss maker at this stage.
It’s the same for EVs. Tesla Inc (NASDAQ: TSLA) is trading at a forward PE of 98x. Others like Nio Inc (NYSE: NIO), Li Auto Inc (NASDAQ: LI), and Xpeng Inc (NYSE: XPEV) are still losing money.
Yet 5G is a different proposition; it is more mainstream and it is in the “here and now”.
You can play this through already quite profitable telcos such as Verizon Communications Inc (NYSE: VZ), and AT&T Inc (NYSE: T). Or perhaps through semiconductor companies such as Qualcomm Inc (NASDAQ: QCOM).
4. The CCI (Consumer Confidence Index) has dipped to 2011 levels. How will this affect the markets in both the short term as well as longer term?
The US Consumer Sentiment Index compiled by the University of Michigan did fall back to late 2011-early 2012 levels. But that was in the second quarter of last year.
It has been picking up since then. But at 85.5 points, it is still a long way from the pre-pandemic peak of 100.
I expect that with reopening of the economy and continuing economic growth, we should see that continuing to edge up.
If you’re talking about the Conference Board’s Consumer Confidence Index, we see the same recovery from last year.
5. The recent US real estate market boom: Is it a bubble or is it sustainable?
We have seen a remarkable real estate boom everywhere – the US, UK, Australia, New Zealand, South Korea. The list goes on.
It’s a reaction to low interest rates and the cost of finance. But that is already in the price. Rates are unlikely to go lower.
So, the fundamentals of demand and supply should kick back in. And those dynamics vary from market to market. On balance, I would expect a cooling of prices or at least flattening out of price gains.
The wild card is inflation. Another reason for property prices to go up has been the reality of asset inflation and the threat of consumer price inflation.
If we see both go higher, investors will want to protect their purchasing power by spending their cash now in hard assets such as real estate.
6. What is your professional view on plant-based food manufacturing? There seems to be a growing trend with more people accepting plant-based food as a substitute for meat.
Again, this is a future theme. Sustainability will also require us to consume less meat, in the same way that it requires us to consume less energy – particularly non-renewable energy.
But investing in plant-based food manufacturing will require patience and tolerance of risk and a lot of what we call “duration risk” – that is the risk of earnings expected far into the future.
Have a look at the companies that are in plant-based food: they are either expensive in PE terms or loss making.
Beyond Meat Inc (NASDAQ: BYND) is still in a loss-making situation; Tattooed Chef Inc (NASDAQ: TTCF) is trading on 57x forward PE; and SunOpta Inc (NASDAQ: STKL) is trading on 57x forward PE. Ingredion Inc (NYSE: INGR) is, however, more reasonable at 12x PE.
So, choose wisely. Look at their earnings potential in near years and not just the blue skies in the future.
Disclaimer: CGS-CIMB Securities Chief Investment Strategist Say Boon Lim doesn’t own shares in any companies mentioned.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be.
In his spare time, Tim enjoys running after his two year-old son, playing football and practicing yoga.