(April 3rd, 2023)
By (Blake Merriman, Equity Analyst)
Edited by (Ascanio Cicogna, Head of Research)
Introduction
With the collapse of many mid size banks such as SVB over the past couple of weeks, coupled with the Credit Suisse debacle, considerable volatility and confusion from investors was visible throughout the stock market. In the midst of the banking turmoil, financial commentators still believed that there were signs that the market could be turning bullish, many of these reasons were covered by Marco Signorelli in a previous BSTA article. Now as we leave the eye of the storm, clearer skies are forming in markets in the United States and around the world. This article will cover where and why markets are switching up as well as provide advice on how to take advantage of the current market situation. In order to achieve this, this article will start by identifying important bull markets, then analyse why these markets are deemed bullish and lastly it will identify potential stocks to pursue or monitor.
Where Are Markets Turning Bullish
Many of the most commonly used indexes have been in the green recently, such as the Nasdaq Composite Index (the market capitalisation- weighted index of stocks listed on the Nasdaq) which Is up more than 13% and the S&P 500 (the market capitalisation-weighted index of the 500 leading publicly traded companies in the U.S), up around 4.9%. The positive growth in these indexes represents an overall improvement in markets generally since they consider a broad range of companies in a broad range of industries. However, it is important to consider the concept that the indexes are weighted according to market capitalisation which means that the impact that a companies share growth has on overall index growth is determined by the number and value of the shares of the given company. In the case of the NASDAQ Composite Index, the latter gives heavy weighting to tech companies and the S&P 500 is also, albeit to a smaller degree, strongly influenced by the tech industry.
Thus, by taking a closer look at tech stocks it is possible to find a clear root of the growth in the improvement of both indices. For example, year-to-date gains for tech giants such as Apple, Microsoft and Alphabet have improved with prices rising 24%, 17% and 15% respectively. Furthermore, Meta shares are up 70% and Elon Musk’s Tesla is up nearly 60%. These are some very impressive numbers and it is clear to see that tech stocks are therefore the most likely cause of growth in the major indexes, with Goldman Sachs analysts estimating that without the six largest tech issues, the S&P would have been down 2% for the year.
Figure 1: Tech stock performance Dec 2022 - March 2023
Emerging markets also started manifesting bullish sentiments as stocks rose for a third straight session on Thursday 30th of March, this trend was closely followed by MSCI’s index for emerging market stocks which rose 0.4%. The latter is set to rise nearly 3% for the first quarter of 2023. Another positive sign for emerging markets came from an HSBC survey posed to investors which showed that two thirds of investors expected emerging market equities to outperform those of the developed economies in the next three months of Q2. The survey covered a large range of investors, with a total of $547 billion in assets under management.
Why are Some Markets Turning Bullish
There are two key reasons for the bullish behaviour behind tech stocks, the first is the banking crisis and the second is lower expected yields on bonds. When SVB and other banks unexpectedly collapsed markets saw a large increase in volatility. This was shown via an increase in the VIX index (an index which tries to judge the 30 day expected volatility of the US stock market) from around 19 to 26. Investors became panicked and were looking for a “safe haven” to put their money into. The strong balance sheets of big tech stocks and their limited need for funding to sustain themselves means that investors viewed tech stocks as being more secure during a period of financial turmoil. This fundamental stability of large tech stocks then allowed herd behaviour to take control leading to the large growth observed.
Furthermore, a swift tumble in Treasury yields is also helping boost tech stocks. The reduction in yields on bonds and general bond volatility has disincentivised investors from buying them, further increasing the investment into tech stocks.
As covered in previous BSTA articles, increased liquidity injections into many economies including the United States could be a source of future bull markets but, as of yet, these injections have not taken large effect.
The emerging markets increased bullishness stems largely from the Asian markets, which have been particularly fuelled by investors expectation for the Chinese market to rebound post lockdown. Furthermore, the reduction in the required reserve ratio for Chinese banks means that there is likely to be an increase in lending and therefore a potential expected increase in Chinese economic activity in the future. In addition to this, the general positive sentiment by investors on emerging markets mentioned earlier in the survey conducted by HSBC and a small reduction in risk aversion by investors is likely creating the right conditions for a full-on bull market.
What Does this Mean for You?
In conclusion, it seems that some markets possess the conditions needed to become bullish, however, currently the only serious manifestation of a bull market is in tech stocks. Thus, this article would suggest waiting a moment, but keeping an eye on high beta stocks with strong fundamentals.
In terms of emerging markets, we believe it would be a good opportunity for investors who may be looking to diversify their portfolio from stocks in the United States and Europe. It is important to remember that emerging market stocks tend to be riskier and thus should not form the bulk of one’s portfolio, in particular, investors should be cautious when trading OTC stocks, which may trade infrequently and be distorted by swings in volume.
Currently investors may want to consider Chinese stocks such as Alibaba Group Holding Ltd., Trip.com Group Ltd and ICICI Bank Ltd. Alibaba being the largest e- commerce platform would benefit from the loosening of the Chinese economy. Trip.com, based in shanghai, is predicting a 70% surge in revenue this year as Asia reopens for travel, making it a good stock to keep an eye on. Finally, ICICI Bank Ltd. Is one of India’s largest banks and thus is well positioned to capitalise on any increases in economic growth in India via lending, as well as its other services such as insurance, investment banking and pension services.
Citations
Are stocks back in a bull market? Retrieved March 31st, 2023, from:
Asia-Pacific markets climb after tech stock led gains on Wall Street. Retrieved March31st, 2023, from:
Big Tech stocks retake the lead. Retrieved March 31st, 2023, from:
Emerging market investors turn increasingly bullish for Q2 – HSBC survey. Retrieved March 31st, 2023, from:
Emerging Markets – Stocks, currencies eye second straight quarterly gain. Retrieved March 31st, 2023, from:
Morgan Stanley turns ‘outright bullish’ on stocks in Asia, emerging markets. Retrieved March 21st, 2023, from:
7 of the Best Emerging Market Stocks to Buy. Retrieved March 31st, 2023, from:
Tech Stocks Seem to Be a Haven From the banking Crisis, for Now. Retrieved Match 31st, 2023, from:
Legal disclosure:
The projections or other information generated by BSTA regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. As such, BSTA does not assume any legal responsibility for actions that may have been taken by readers associated with any investment projections made by the members of BSTA. There are risks associated with investing in securities. Investing in stocks, bonds, exchange traded funds, mutual funds, and money market funds involve risk of loss. Loss of principal is possible.
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