The Inflation “issue”
Investors should transfer parts of their portfolio in order to take advantage of the recent decrease in interest rates, says Tom Lee of Fundstrat.
According to a statement from one of Lee’s clients, some of the market patterns from earlier this year may be reversed if interest rates were to decline more.
As a result, Fundstrat upgraded megacap technology, or FANG, from underweight to overweight, while downgrading financials to neutral from overweight. FANG stands for Facebook, Amazon, Netflix, and Alphabet, the parent company of Google. Apple and Microsoft will also be included in the group of investors, according to some.
“We are reconsidering which sectors will propel the S&P 500 to 4,400 by mid-year 2021.” (really next 4 weeks). The primary reason for this shift in perspective is that interest rates are falling, and to a lesser extent, it reflects the fact that markets have already “panicked” about inflation,” according to the note.
The S&P 500 reached a new high of 4,239.18 on Thursday.
Lee acknowledged that the change in major tech stocks was dramatic, but he believed that acting quickly was justified.
“We downgraded FANG in early May, so this is a somewhat abrupt change in our view on FANG. But we don’t want to be obstinate. “Neither is the future certain,” he added.
Lee believes that if interest rates do indeed rise, investors should sell financials and buy technology/FANG.
Alphabet, Amazon, Tesla, Apple, Cisco, Microsoft, and Nvidia are among the strategists’ favorite tech-related core plays.
The strategist is still optimistic about many of the popular reopening plays. Lee’s top sector idea is energy.
South Korean stocks as inflation winners
According to Goldman Sachs, the South Korean equities that stand to profit or suffer due to increased prices in North Korea include Kangnam Securities and LG Telecom.
Rising producer prices are putting the least amount of pressure on margins in the following stocks:
Capro Corporation, OCI, and Cosmo Chemical Engineering firm Doosan Infracore Sam-A Aluminium, an aluminum product manufacturer
In contrast, the following stocks are on Goldman’s list of those under pressure:
Hankook & Company, a battery storage manufacturer, Electronics manufacturer Korea Circuit Logistics firm Hyundai Glovis Paper products manufacturer Daeyoung Packaging Hankook Shell Oil, a producer and distributor of lubricating oil.
In comparison to increases in producer prices, Goldman observed that consumer price inflation in South Korea has been relatively stable. According to the bank, this indicates that companies have not “meaningfully” passed on higher costs to consumers.
According to the most recent official data, the country’s producer price index increased 5.6 percent year on year in April, while the consumer price index increased 2.6 percent year on year in May.
However, companies absorbing higher costs do not mean that margins and profits suffer, according to the Wall Street behemoth. It went on to say that an improving economy has been “the primary driver of corporate profits and profit margins” among South Korean firms.
Capability to increase profits
Goldman also stated that companies with “high operating leverage” are better positioned to grow profits while mitigating margin pressure from producer price inflation.
The ability of a company to generate profits by increasing revenue is measured by operating leverage. If a company has a large amount of fixed costs to cover and must generate enough sales to cover those costs, it is said to have high operating leverage. After deducting the fixed costs, such businesses typically earn higher profits.
According to Goldman, the following stocks have some of the highest operating leverage in South Korea:
SK Inc, a conglomerate with businesses in various sectors including energy, telecommunications and construction Tire manufacturer Kumho Tire Steel producer Hyundai Steel Heavy industries firm Korea Shipbuilding & Offshore Engineering Retail company Shopping at Lotte
Meanwhile, the companies with the lowest operating leverage are:
Nongshim Food and beverage company Korea Electric Power DSME, a shipbuilding and marine engineering company Hyundai Development Real estate and construction company Ottogi
Is crypto bearish?
To maintain the bullish narrative, a major catalyst for the bitcoin price rally, major investors are lacking in demand, according to JPMorgan analyst Nikolaos Panigirtzoglou.
The price of bitcoin is now greater than the price of its future contracts. The quantitative analyst said this is occurring for the first time since 2018, and it is a symptom of the institutional buyer’s lack of interest.
“This is an unusual development and reflects how weak bitcoin demand is right now from institutional investors who typically use regulated CME futures contracts to gain exposure to bitcoin,” he said, referring to the derivatives marketplace.
Bitcoin futures typically trade with a higher, positive spread over current or spot prices.
“We believe that the recent return to backwardation is a negative signal pointing to a bear market,” the analyst said.
Even with the introduction of crypto-related funds and increased participation in the futures market by institutional investors, the futures to spot spread has not been normalized, and the market remains “crypto rich and cash poor,” according to Panigirtzoglou.
Bitcoin’s price has dropped by more than 40% since its all-time high of over $64,000 in April. During a 30% intraday drop last month, the cryptocurrency fell to nearly $30,000 per coin. It has since recovered to levels above $36,000, raising hopes that a bottom has been reached.
Panigirtzoglou’s analysis of bitcoin investor flows is widely followed on Wall Street. Some traders believe his report indicating large investors selling bitcoin contributed to May’s aggressive sell-off.
JPMorgan stated in the note that the largest cryptocurrency by market cap needs to regain its dominance in the total crypto market in order to bounce. According to Coin Gecko, it currently accounts for approximately 31.5 percent of total crypto market volume. Panigirtzoglou stated that it would have to rise to more than 50% in order for the bank’s negative outlook to change.