BEACONS OF THE WEEK
The two main purposes of a Lighthouse are to serve as a navigational aid and to warn ships (Investors) of dangerous areas. It is like a traffic sign on the sea.
Cordouan Lighthouse, Gironde, France
This lighthouse was originally constructed in 1611. It was automated in 2006. The lighthouse is 67.5 meters tall making it the 10th tallest traditional lighthouse in the world. It was designated as a World Heritage Site in 2021 by UNESCO.
La Jument, Ushant, France
This lighthouse is located in Northwestern France. The lighthouse is 300 meters off the coast and stands at 48 meters tall. The lighthouse was originally built in 1911 and was automated in 1991. Currently solar power fuels this French lighthouse.
*Feel free to send us your photos of Lighthouses to be featured in our weekly market observations. *
Emerging markets technical breakout?
Top down Charts released a fascinating chart that caught our eyes this week.
The chart tracks an emerging market basket without China. This basket includes exposure to the largest emerging markets worldwide except for China.
The chart shows a technical breakout over the previous resistance. Resistance, that the index and group of stocks have failed to significantly breach for over 15 years.
We think this move is decisive and something very important to watch. For close to 15 years emerging markets have lagged U.S. equities by quite a wide margin. For the most part emerging market equities are down or flat over the last 15-20 years. This under-performance is something that we think will change.
Certain emerging markets are the fastest-growing economies in the world and are expected to continue to grow at that rate for years to come. These nations also continue to improve the quality of life for their populations through the integration of technology and economic development. Corporate earnings, dividends, and stock buybacks will correlate with this strong economic growth in these countries.
We like the chart above as it removes China from the equation. China is the world’s second-largest economy and the world’s largest emerging market. The country has seen tremendous economic growth over the last 40 years. However, that growth has slowed and there is another risk that many investors are highlighting that exists in China. Geopolitical risk. China has become an adversary of the U.S. and the West. Companies have begun exiting China due to the political, operational, and geopolitical risks that exist in China. Instead, they are nearshoring or moving operations to a competitor in China. Many companies are moving into other Southeast Asian countries, as well as India as an alternative to China due to the low cost of labour and lower risk they present. Other companies are nearshoring and moving operations to Mexico or even within the U.S. as companies try and bolster their supply chains to limit their exposure to geopolitical risk and tariffs being put into place between China and the U.S.
As you can tell, we are bullish on emerging markets and really like the technical breakout we highlighted above, but our readers know that’s not the only thing we like on this topic. We are sure you understand why we like emerging markets if you are a regular reader of this publication as we have stated it before in this publication’s history in detail. The companies as well as indices in emerging markets trade inexpensively in terms of every metric P/E, P/B, P/S, EV/EBITDA, their economic growth rates are high and are expected to remain high, earnings are forecasted to explode, and GDP per capita is moving up across numerous emerging markets.
For individual exposure, we like India and Mexico and have championed both for quite some time. However, we also have overall emerging market exposure in numerous client accounts through an ETF that owns a basket of companies across emerging markets.
Disclaimer: MacNicol & Associates Asset Management holds emerging market stocks, and ETFs across various client accounts.
Microsoft earnings
Microsoft reported its fiscal fourth-quarter earnings on Tuesday evening. The highly anticipated earnings sunk the stock in after-hours before Microsoft shares opened down 1-2% on Wednesday. The sharp 7% decline after hours was due to Microsoft not beating earnings and revenue estimates by wider margins. Microsoft reported earnings per share for the quarter at $2.95 versus a $2.94 estimate and revenue of $64.7 billion versus a $64.38 billion estimate. These small beats led to a momentary sharp decline in Microsoft shares.
However, shares quickly rebounded when investors and analysts heard about Microsoft’s spending growth on artificial intelligence. Microsoft spent $19 billion on cap ex last quarter, nearly all of which was cloud and AI-related. Wall Street wants to see continued growth in AI spending from technology companies as it will continue to drive the growth of chip makers.
The bullish news on AI spending sent AI stocks upwards on Wednesday after their multi-week declines. As of midday on Wednesday, Nvidia shares were up 11% as were the shares of many other chipmakers and AI stocks.
AI and semiconductor stocks did not only jump from the news from Microsoft on Wednesday. AMD reported strong demand for earnings on Tuesday afternoon in their earnings report.
For now, it seems investors have pivoted off their short-term bearishness on AI stocks, the tech sector, and the rest of the market and yet again see the growth in the sector.
Markets are as sensitive as ever to news pieces and investors seem to be extremely reactive to everything. Buckle up. Only a few more weeks until Nvidia reports and investors, the media, and Wall Street label it “the most important earnings report ever”.
In just one day investors flipped from fearful to greedy according to CNN’s Fear & Greed Index. The wonderful world of AI turning the pessimistic to optimistic in the blink of an eye.
FED holds put
The Federal Reserve made its latest interest rate policy decision on Wednesday. In a move that surprised nobody, the FED decided to keep rates in place despite some relief on the inflation front and other Central Banks across the world beginning to cut rates. Most notably, the Bank of Canada has now cut rates twice for a total reduction of 50 basis points for Canada’s benchmark interest rate.
This keeps the FED funds rate at 5.5%. The FED has yet to cut interest rates since the pandemic began. However, a cut could be coming as Chairman Jerome Powell recently said in an address to Congress that waiting too long or cutting too little could hurt the economy.
In the FED’s statement on keeping rates the same, they pointed to needing greater confidence in the inflation rate return to the 2% target set by the FED. However, officials made it clear that they will not wait to see the inflation rate get below 2% to start cutting.
The FED will see two inflation reports before their next decision is due. We will see what happens in July and August.
The last time the FED changed the FED Funds Rate was a year ago in July when they raised rates for the last time in this hiking cycle to combat high inflation.
In Jerome Powell’s press conference, after the decision was announced by the FED, Powell reiterated that a rate cut is on the table for the FED’s next meeting in September and that it just depends on some good data.
In a new development, FED officials also signaled they will give more weight to the weakening U.S. labor market when deciding when to cut interest rates. The FED has a congressionally mandated mission of maintaining low inflation and low unemployment.
However, for the most part, the FED did not change its verbiage at Wednesday’s meeting in terms of what it sees moving forward.
The opposite of cuts
As many developed nations’ Central Banks have begun or are close to cutting interest rates, the Bank of Japan hiked its benchmark interest rate for the second time this year on Wednesday.
This move by the Bank of Japan brings the Japanese benchmark rate to 0.25%, the highest since 2008. Yes, you read that right, a 16-year high, and interest rates in Japan are only at 0.25%. For those who forget, Japan had negative interest rates for quite some time.
The Bank of Japan also released a detailed plan to slow its massive bond-buying program, in another step towards phasing out a decade of massive stimulus. The Bank of Japan will reportedly half its current pace of bond purchases by the beginning of 2026. The stakes are high for the Japanese as the Bank of Japan aggressively bought bonds to reflate growth and now owns roughly half the total Japanese government bonds in the market. The Bank of Japan will have to tread cautiously so it does not trigger a spike in yields that would boost the cost of financing Japan’s huge public debt.
As Japanese yields rose, the Yen strengthened on Wednesday. The Yen has been beaten down in recent years, perhaps this policy change by the new regime at the Bank of Japan can lead to a stronger Yen.
Horrible news
Venezuela is in the news this week for all the wrong reasons. Venezuela held a federal election over the weekend where incumbent President Maduro faced off against Edmundo Urrutia, a former politician in the 1990s. Maduro has been President of Venezuela since 2013 and has run the country like a dictator and applied his failed socialist ideologies to his nation. This has led to mass inflation, extreme poverty, unrest, increased crime, and several other issues over the last decade plus. The challenging candidate, Edmundo Gonzalez ran on a centrist platform that promoted unity, the recovery of the economy, and democracy. Gonzalez was unknown to most of Venezuela until he launched his campaign in May after replacing a candidate who was barred by Maduro from running for President due to fraud allegations.
Maduro succeeded Hugo Chavez in 2013. Chavez is famous in his own right and was Maduro’s mentor. They believe in the same things, and both failed the people of Venezuela. Both men believed in socialist policies where they nationalized private companies and even industries. They both also operate like dictators and have enriched themselves while their populations lay in poverty.
Protests erupted across the country in the wake of this news. Some law enforcement turned on Maduro and joined the protests. However, Maduro is protected by his army made up of numerous communist groups and street gangs that support him. These groups have for years shut down political dissent in the country and are completely loyal to Maduro.
Over the last year, there has been a lot of momentum behind the opposition party in Venezuela as the population seems to finally be over socialism. The country has had triple-digit annual inflation rates, stagnant economic growth, soaring poverty, and a huge exodus in their population due to failed policy.
Before Chavez rose to power, Venezuela was the richest Latin American nation, now it’s the poorest. GDP per capita in Venezuela is the same today as it was in 1980. When you compare that number to Venezuela’s neighbors’ growth, it is a dark picture.
Venezuela was once one of the richest countries in the world due to its vast oil reserves which are the largest in the world. Now the country cannot get oil out of the ground and Venezuela ranks 22nd in terms of largest oil exporters in the world. In recent years, Venezuela’s state-run oil company has even struggled to find buyers for its oil as the Trump administration blacklisted the company and sanctioned the country economically in 2018 over a similar situation where Maduro looked to have stolen an election. This led to the Venezuelan state oil company selling oil on the black market.
However, in 2023 the Biden administration removed these sanctions, particularly on the oil sector in exchange for Maduro and Venezuela to run free and fair elections moving forward. Many speculated that the U.S. did this to depress oil prices as they had soared in recent years and energy prices were becoming a major issue.
Regardless of your political opinion, short-term price decreases for oil should not be a reason to negotiate with a socialist dictator who is ruthless.
Many leaders around the world have voiced concerns with the election process and the protests this week including the U.S., Canada, Chile, and El Salvador. However, many are waiting on Brazil’s President for a real statement as President Lula of Brazil is also a deep socialist and is a Maduro ally. Lula has only said so far that the process needs to be transparent.
We are not sure what will happen next. The only thing we do know is Maduro will be extra violent on his way out and will do anything to stay in power. He nominated an ally of his to review the election data and confirm his win.
We hope the people of Venezuela get the change they have long deserved as this once prosperous and democratic nation has become a socialist dictatorship filled with poverty.
We do not invest in Venezuela and would need to see serious change at the top and throughout the economy before we consider it. However, we will say that Latin American stocks are relatively cheap and many countries in the area have large growth tailwinds that Venezuela could also have with the right people or party in charge.
MacNicol & Associates Asset Management
August 2, 2024
3323 NE 163 Street, PH-704
130 Bloor Street West, Suite 905
