Technology
Through February and March, the number of US ‘job losers’ surged by almost half a million. Constituting the largest two-month increase in Americans who have lost their job since the depth of the pandemic. Unless we see a big drop in the number of job losers in the coming months, the correct investment strategy is still to position for a US recession that starts in 2023.
When complexity collapses, it is a red flag for impending tail-events, heart attacks, and reversals in the markets. We describe how to measure complexity, how to spot the red flag that it has collapsed, and list some investments that are approaching potential turning-points.
Stay defensive in the second quarter. We can see a narrow window for risky assets to outperform but we recommend investors stay wary amid high rates, supply risks, extreme uncertainty, peak polarization, and structurally rising geopolitical risk.
Bank failures are another ‘canary in the coal mine’ warning that a US recession is imminent, yet stocks, bonds, and the oil price are still a long way from fully pricing it.
Generative AI is a major technological breakthrough that holds tremendous economic and investment promise and will have sweeping effects on wide swaths of the economy. We are bullish on generative AI as a long-term investment theme. However, at the moment we observe hallmarks of an investment frenzy. We believe that there will be a more attractive entry point for patient investors.
The equity market is back to the 2019 level on an inflation-adjusted basis. However, it is still not cheap as it is not pricing in the possibility of a prolonged and deep earnings recession or a higher interest rates regime. Many areas of the market that appear cheap, are cheap for a reason. The only industries that are cheap because they are growing into their valuations are Energy and Airlines. We are upgrading Airlines to equal weight.
Since 1970, the track record of US housing recessions as the ‘canary in the coal mine’ for economic recessions is a perfect four out of four: 1974; 1980; 1990; and 2007. If this perfect track record continues, the current US housing recession presages an economic recession that starts in 2023. We discuss the investment implications.
Macroeconomic and business conditions are gradually becoming more favorable for Tech as the bottoming of demand is in sight. Yet, we don’t believe that now is an attractive entry point - the good news is fully priced in, and technicals signal a pullback. However, the sector is worth monitoring as we are getting closer to a sustainable rebound. Our positioning remains unchanged.
The regulatory clampdown on Chinese platform companies is over. However, these companies have entered a new phase of active government control. Going forward, most platform companies’ strategic and business decisions will prioritize national interests, at the expense of shareholder interests. After the recent sharp outperformance, we suggest reducing the allocation to China's Investable Index from neutral to underweight within both global and EM equity portfolios.
The Web 2.0 bubble is bursting, with far-reaching consequences for US stock market behaviour, sector allocation, and global asset allocation.