7 epic value trades

good morning. Armstrong returned here after spending a week in California. He's much more comfortable in Los Angeles in January than he is in New York in January, and I can report that the best song to come out of his rental car window on Rodeo Drive is “Los Angeles, I'm Yours” by the Decemberists. . I don't see the relevance of either point to the market, but that's okay. Email us: robert.armstrong@ft.com and ethan.wu@ft.com.

Mag 7 Value Trade

Market experts often talk about the Magnificent Seven's big tech stocks as homogeneous. This is wrong. What these stocks have in common is that they're all up quite a bit since the pandemic began. However, as this graph shows, the dispersion of returns is very wide.

Amazon is barely beating the S&P 500, Nvidia is a total flop, and the rest of the companies range somewhere in between. What's more, these seven are very different as businesses and stocks. Nvidia is a game of pure artificial intelligence. Apple is a premium consumer stock with defensive characteristics. Amazon is a hybrid of retailer and cloud computing. and so on.

These differences are also reflected in valuations and growth rates. While certain Wall Street observers talk about a magnitude 7 “bubble,” the valuations of Meta and Alphabet — two tech companies that make money by selling advertising — are much closer to the valuation of the overall market. I can be proud of it. Growth is expected to far exceed the market average. When these two are in a bubble, the entire market becomes a bubble.

Bubble hunters may be able to make a better case against Apple and Microsoft. They seem more expensive than his two advertisers, but they don't offer short-term growth (in Apple's case, the growth rate is much lower). Amazon, Tesla, and Nvidia have achieved more growth and offer even higher valuations (although if you use P/E/growth to convert Nvidia's valuation to short-term growth, it's surprising Looks like the cheapest of the group!). Bubble issues aside, I would say that there is at least as much of a rough value and growth split within Mag 7 as there is in the broader market.

All this leads to interesting questions. Will Mag 7's growth, or Mag 7's value, do even better in the coming years?Unhedged, in his stock pick for the FT Stock Picking Competition, is already betting on the value to perform better in 2024 . Fortunately, each journalist is allowed an entry in this competition, so by taking advantage of Ethan's slot, we had the chance to double his value. Mag 7 relative value portfolio. His five-stock rule for this contest leaves him room to go long Google and Meta, and short Microsoft, Nvidia, and Tesla. (I excluded Apple and Amazon because, as purely as possible, I wanted a portfolio where cheap value outweighed expensive growth. Apple is expensive, but it's basically defensive rather than growth-oriented. Also, Amazon's valuation is difficult to interpret; profit margins are intentionally low.)

Is the resulting long-short portfolio something we would actually want to hold with our own money? Of course not! Betting on Nvidia and Microsoft is stepping in front of growing momentum, and Tesla stock could do anything. The risks are huge. But it's an interesting bet editorially, and it might pay off in a year when values ​​come back and AI hypes subsidies.

We want to know how our readers can build their own Mag 7 long/short portfolios. Microsoft and Alphabet will report earnings this afternoon. Apple, Amazon and Meta will follow on Thursday.

China's “meh” economic stimulus plan

Writing about China poses two problems for a U.S.-focused column like ours. First, U.S. risk assets are relatively isolated from the Chinese economy. Second, it is becoming increasingly difficult to fault global investors for skipping their allocation to China altogether. The immense political risks are frightening. Still, U.S. investors can't escape China's influence. Despite production cuts by the Organization of the Petroleum Exporting Countries (OPEC), sluggish demand from China has kept oil prices under control. China's strong economic recovery could also challenge the recent performance advantage of US stocks, either directly or indirectly through assets in Japan and Europe.

In other words, China's growth is important, as is the success of the authorities' efforts to stimulate the sluggish deflationary economy. how is it?

Officials are still trying to unclog the growth machine. The latest efforts include lowering some policy rates and changing rules to allow commercial real estate developers to borrow to pay down old debt. The state has also intervened to prop up the stock market, which has fallen more than 20% over the past year, by restricting short selling, tightening capital controls and mobilizing state-owned enterprises to buy on the spot. A RMB2 trillion ($280 billion) stock market “stabilization fund” to be raised from offshore funds from state-owned enterprises is reportedly being considered. All of this is a continuation of last year's phased stimulus push, which we explained in August:

Faced with sluggish demand and a sluggish real estate sector, Chinese authorities have pulled out just about anything. They lowered lending rates, mortgage rates, business taxes, stock trading fees, and even admission fees to tourist attractions. Extension of EV subsidies. Relaxation of regulations. Intervened in the foreign exchange market. and extension of stock trading hours.The only thing they haven't tried [is] Fiscal stimulus.

Since then, more financial support has been added. The central government announced a surprise borrowing of 1 trillion yuan in the fourth quarter, which analysts believe will push China's budget deficit above 3% of GDP, roughly considered the red line. According to Bloomberg, a separate 1 trillion yuan “special” bond issue is also being considered. The central bank's “promised additional lending” program, a quasi-fiscal facility for discount lending used in past stimulus packages, increased the pace of lending by 12% in December.

However, the situation remains that a series of cobbled-together stimulus measures are still being rolled out. This is very different from the huge economic stimulus programs that China has implemented in the past. After the financial crisis, it spent RMB 4 trillion (approximately 13% of GDP at the time) on infrastructure development. Faced with a slowdown in demand from 2015 to 2018, it launched multitrillion-dollar projects to rebuild slums. The contrast is stark, with some analysts suggesting that today's modest stimulus measures have yet to be adopted. Despite attempts to ease financial conditions, corporate borrowing decreased and loan refusals increased in January, according to a survey by China Beige Book.

So why take such a timid approach? The most plausible answer, as Goldman Sachs China analysts argued in a recent note, is that official targets are under stress. The most well-known constraint is that local governments have high debt levels, limiting the amount they can borrow to provide stimulus. Goldman added that differences in debt levels between cities muddy the fiscal picture. Cities with high debt will need to cut spending to pay down debt, while cities with low debt will need to step up investment.

Regarding monetary policy, the central bank's ability to cut interest rates conflicts with the competing goal of currency stability, as aggressive rate cuts lead to a depreciation of the renminbi. Banks may also be at risk. Lowering interest rates would likely weigh on net interest margins, which are already at record lows, without doing much to rein in the pipeline of non-performing real estate loans. This helps explain why the People's Bank of China, facing a massive real estate collapse, has only reduced interest rates gradually, and interest rates remain well above 0%.

Here are the conclusions from Goldman:

. . . The multiple objectives and constraints that governments face make policy-making more diverse and opportunistic. Different cities and states take different approaches to managing implicit real estate and municipal debt risks, and rate cuts are managed around Fed decisions, dollar movements, and bank net interest rates. margin. As a result, continued policy easing is perceived by markets as slow, inadequate, and uncoordinated. However, policy easing is ongoing, and even if the exact scale, form and timing can be secured, the real GDP growth target (which is likely to be “around 5%” again in 2024) will be secured. It is important to recognize that it is unlikely to stop until then. Predictions have become extremely difficult and policy “bazookas” are a thing of the past.

This interpretation makes sense to us as well. This suggests that an inflection point in China's economy and the risk assets that depend on it may not receive widespread attention if it occurs. This could be an opportunity for China watchers. (Ethan Wu)

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