3 Key Trading Themes For 2023

By Danish Lim, Investment Analyst, Phillip Nova

1) US Federal Reserve Pivot – Is it time to chase the rally?

US equities have rallied over the past month on the back of renewed risk-on sentiment. Markets have been ignoring the Fed’s rate hike trajectory and pricing in rate cuts in late-2023. Nevertheless, recession risks are growing, Manufacturing and Non-Manufacturing PMIs are in contraction territory well below 50. The 10Y-3M Yield Curve is also inverted at its deepest level in 40 years.

As expected, the Fed hiked rates by 25bps in the recent Feb policy meeting. Fed Chair Jerome Powell noted that a “disinflationary” process appears to be underway but it is still “in the early stages” and that the Fed has “a long way to go”. He also pushed back against market expectations of 2023 rate cuts, emphasizing that policy will “stay restrictive for some time”.

With no Fed pivot in sight, we think it is wise to abide by the mantra of “Don’t Fight the Fed” and remain cautious in chasing the recent rally as recession and overtightening risks remain high. Although peak inflation is encouraging, ongoing tightness in the labour markets and the loosening of financial conditions is likely to put pressure on the Fed to be more hawkish than markets expect.

In our view, we forecast that the current market rally may fade out towards the end of Q1 and end up being premature. Although the Fed is yet to conclude its hiking cycle, markets are currently behaving similar to an early cycle recovery phase, contradicting most economic indicators. We could see a decline corporate earnings and valuations as we move through Q2 and Q3.

To weather near-term bearishness, we recommend discounted low beta stocks with good profitability and a strong balance sheet:

• Stride Inc (NYSE: LRN), +36.03% YTD*. Technology-based online and blended education provider; also offers career learning/training.
• Jacobs Solutions (NYSE: J), +4.44% YTD*. Provides technical, consulting, scientific, and construction services.
• Papa John’s international (Nasdaq: PZZA), +16.38% YTD*. Popular Pizza franchise.
• The Brink’s Company (NYSE: BCO), +22.4% YTD*. Offers security services globally.

As the year progresses, we expect investors to look past market weakness and focus on a potentially clearer Fed pivot in 2024. We prefer high beta stocks trading at a discount to their historical P/E ratio:

• Block Inc (NYSE: SQ), +40.69% YTD*. Offers hardware and software for business to accept digital payments
• Zscaler Inc (Nasdaq: ZS), +26.32% YTD*. Cloud-based cybersecurity company
• DocuSign (Nasdaq: Docu), +22.39% YTD*. Provides electronic signature solutions.

2) China’s Re-opening- Hopping into the Year of the Rabbit

Chinese markets have rebounded since the start of 2023, underpinned by a faster than expected re-opening ever since cross-border travel restrictions were lifted on 8 January. The COVID-19 situation seems to be in control, without any major outbreaks during the Lunar New Year.

We stay bullish on the Chinese market, supported by the government’s clear priority on reviving economic growth and limited signs so far of any potential COVID policy backtrack. At the same time, China’s manufacturing and services sector expanded for the first time in 4 months in January 2023, with the Manufacturing Purchasing Manager’s Index (PMI) rising more than expected to 50.1 from 47.0 in the prior month. The Non-Manufacturing PMI also jumped from 41.6 to 54.4. Thus, in our view, we believe the worst is over and see room for further upside.

On a macro level, we believe consumer consumption and tourism revival will be the key catalysts driving China’s economic rebound. State media reported that Chinese President Xi Jinping recently called for further efforts to boost consumption to enable people to “spend without worrying about the future”. According to the Ministry of Culture and Tourism, around 308M people travelled for leisure during the Lunar New Year, amounting to one-fifth of the population, reaching around 88.6% of pre-pandemic levels.

Additionally, the Chinese consumer economy is still healthy, with households sitting on the largest pool of savings in history due to strict COVID-19 policies. Data from the People’s Bank of China (PBOC) showed that renminbi (RMB) household deposits surged by a record RMB 17.84 trillion ($2.6 trillion) in 2022, up from RMB 9.9 trillion in 2021. We expect consumers to deploy this pool of excess savings as they engage in “revenge spending” once the economy fully reopens. Consumer spending will be supported by relatively low inflation compared to the rest of the world, with China’s Consumer Price Index (CPI) rising by 1.8% in December 2022, up from 1.6% in the previous month, but still well below its official target of around 3%.

Our top picks to ride on China’s consumption and tourism recovery are:

• Kweichow Moutai Co Ltd (SZSH: 600519), +5.27% YTD*. High-end liquor maker
• China Tourism Group Duty Free (SZSH: 601888), -2.35% YTD*, Seller of duty free goods
• Shanghai International Airport Co Ltd (SZSH: 600009), +5.3% YTD*. Operates Pudong Airport and Hongquiao airport in Shanghai
• Sands China (HKSE: 1928), +11.39% YTD*. Operates resorts, retail malls, and casinos in Macau.
• Xtep Intl Holdings (HKSE: 1368), +21.59% YTD*. Designs and markets sportswear.

Apart from re-opening, another key growth driver would be an increasingly supportive regulatory environment for China’s Internet sector. The government has eased some of their aggressive crackdowns on internet companies, lowering the regulatory risk of the sector. The recent approval of Ant Group’s capital raising is one of the many positive developments.

We lean towards high beta social media and e-commerce stocks such as:

• Tencent Holdings Ltd (HKSE: 0700), +21.3% YTD*.
• Alibaba Group Holdings Ltd (HKSE: 9988), +22.78% YTD*.
• Pinduoduo Inc- ADR (Nasdaq: PDD), +22.15% YTD*.
• Weibo Corp- ADR (Nasdaq: WB), +32.93% YTD*.
• Kuaishou Technology (HKSE: 1024), -2.74% YTD*.

3) Malaysia’s shift toward green mobility, renewables, and cybersecurity

Malaysia has been actively pushing for a transition towards green mobility. Natural Resources, Environment, and Climate Change Minister Nik Nazmi Nik Ahmad said that there will be more EV-related incentives and exemptions in the upcoming revised Budget 2023 due on 24^th Feb. Prime Minister Anwar Ibrahim also recently stated that Malaysia will ramp up its participation in technology and the green economy in its review of the 2023 budget.

This transition is supported by the launch of the Malaysia Renewable Energy Roadmap (MyRER) for 2022-2035 by the Ministry of Energy and Natural Resources. The roadmap targets 31% renewable energy mix by 2025, and 40% by 2035.

Most recently, during Prime Minister Anwar Ibrahim’s official visit to Singapore on Monday Jan 30, 3 agreements were signed between Malaysia and Singapore covering various aspects of cybersecurity, as well as the digital and green economies. We interpret his visit to be supportive for the cybersecurity sector as it is clear that it is a top priority for the Malaysian government.

Our top picks are:

• Cypark Resources Bhd (KLSE: CYPARK), +123.4% YTD*. Provides environmental remediation and landscaping services
• Greatech Technology Bhd (KLSE: GREATEC), +5.58% YTD*. Automation solution provider whose products are used in the manufacturing of solar modules/panels.
• Solarvest Holdings Bhd (KLSE: SLVEST), +30.99% YTD*. Provides engineering and construction services for solar projects.
• Malaysian Pacific Industries (KLSE: MPI), 20.79% YTD*. MPI manufactures and sells Silicon Carbide (SiC) power technology which are vital for EVs.
• Systech Bhd (KLSE: SYSTECH), +44.68% YTD*. Cybersecurity software developer.

*Figures are accurate as of 3 February 2023, data from Bloomberg.

References:

1) Fed Chair Jerome Powell’s comments on Inflation – https://www.cnbc.com/2023/02/07/fed-chief-powell-says-the-the-disinflationary-process-has-begun-but-has-a-long-way-to-go.html

2) PBOC Figures for 2022 – http://www.pbc.gov.cn/en/3688247/3688978/3709137/4765043/index.html

3) PBOC Figures for 2021 – http://www.pbc.gov.cn/en/3688247/3688978/3709137/4446682/index.html

4) Malaysia Renewable Energy Roadmap (MYRER) – https://www.seda.gov.my/reportal/myrer/