Novum Alpha - Daily Analysis 6 January 2022 (10-Minute Read)
A terrific Thursday to you as markets tank on concerns that the U.S. Federal Reserve has turned far more hawkish than expected.
In brief (TL:DR)
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In today's issue...
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Market OverviewInvestors are focusing on tightening monetary policy as concerns persist about the omicron variant’s threat to global growth and company earnings.
Fed officials said a strengthening economy and higher inflation could lead to earlier and faster rate increases than expected, with some also favoring moves to shrink the balance sheet soon after.
In Asia, markets fell Thursday with Tokyo's Nikkei 225 (-2.62%), Sydney’s ASX 200 (-2.91%), Seoul's Kospi Index (-0.88%) and Hong Kong's Hang Seng (-0.36%) were all down sharply, taking their cue from Wall Street.
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1. Understanding the Tech Stock Rout
Conventional wisdom tells us that investors should avoid tech stocks in a rising interest rate environment.
The spiel goes something like this, in a low interest rate environment, the cost of money is cheap and so that “hot” money needs to go somewhere, from cryptocurrencies to growth stocks.
But when interest rates go up, the assumption is that consumers and businesses will put more money in higher-yielding bonds and savings accounts which are “safe.”
And that conventional wisdom is what led to the sharp selloff in tech stocks yesterday as investors poured over the minutes of the U.S. Federal Reserve’s policy meeting from mid-December.
Meeting minutes suggest that the Fed is looking towards earlier and faster rate hikes, and painting a portrait of a far more hawkish policy approach than previously assumed.
But past periods of inflation have also demonstrated that even when the Fed has tightened, for instance between 2003 to 2007, the Nasdaq 100 outperformed the S&P 500 comfortably throughout most of that period.
In other words, even though rising interest rates may limit the stratospheric heights of tech stocks, they aren’t an absolute inhibitor for outperformance relative to the broader market.
But the prospect of a less accommodative Fed has led to a cascade of selloffs, especially from the long-only crowd for tech firms, creating trouble for hedge funds whose concentrated bets on tech companies were still elevated after last year’s unwinding.
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2. Investors Are Gearing Up for the Metaverse
Whether or not you’re sold on Facebook’s (-3.67%) (now Meta) shift to the metaverse, it’s evident that hardware makers are not waiting to find out if the virtual plane will inevitably supplant the physical realm.
In the same way that the smartphone revolutionized communication and content consumption, more hardware manufacturers are betting that the rise of the metaverse will be critical to their product planning.
Last year, Sony (-6.51%) announced that it had joined forces with English Premier League soccer club Manchester City to develop a metaverse equivalent of the team’s Etihad stadium in Manchester, England.
While this week, Samsung (-0.65%), will give consumers a chance to decorate imaginary homes with digital versions of household appliances at the Consumer Electronics Show in Las Vegas.
If all this seems somewhat confusing, just watch the movie Ready Player One to gather some context.
The metaverse, a catch-all term for the theory that people will spend increasingly larger proportions of their lives in ever more immersive virtual worlds has captured the attention of hardware manufacturers and investors even before it’s caught the attention of users.
Although virtual reality headsets have been around for some time, they’ve long been derided as clunky, with the graphics quality leaving much to be desired in many cases.
Improvements in chip technology as well as hardware ergonomics however may change that.
Just as the first mobile phones were brick-like affairs, improvements in computing power and high speed internet and 5G networks could pave the way for billions across the world to connect virtually through the metaverse.
Against this backdrop, companies that supply the semiconductors, servers, sensors, cameras and displays to power metaverse applications are in the best position to benefit from the revolution.
There is also speculation that Apple (-2.66%) may be throwing its hat into the ring, potentially unveiling a headset as revolutionary to consumer tech as the original iPhone was to the smartphone revolution.
Which bodes well for the already white-hot demand for shares of chipmakers Taiwan Semiconductor Manufacturing Co. (-1.69%) and Nvidia (-5.76%), whose proposed acquisition of chip designer Arm still hangs in the balance.
The metaverse may be as transformational to our lives as the smartphone was and given the pandemic, remote working and meeting may yet prove to be durable trends.
Companies are increasingly looking to more immersive ways for teams that are geographically scattered to collaborate and work more closely together – the metaverse may provide that means, especially as the pandemic has raised the question whether the future of work has changed altogether.
Other trends such as cryptocurrencies and the rise of non-fungible tokens are also blurring the lines between the concepts of digital and physical value.
But the revolution will not happen overnight.
Even the most optimistic projections suggest that the headset market that would power metaverse experiences will lag smartphone sales for years and for now at least, the metaverse lacks content.
All of that could change quickly and network effects, especially if powered by Meta, the successor to Facebook, throws its weight behind the metaverse – where the costs of being excluded from the metaverse are far lower than the benefits.
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Find out more about Novum Alpha as leading luxury portal Luxuo.com interviews our CEO & General Counsel, Patrick Tan...
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3. Bitcoin at Lowest Level Since Last December
Bitcoin slumped to its lowest level since last December’s great deleveraging flash crash as growing expectation of increased borrowing costs weigh on investor appetite for the most speculative assets.
Joining in on the tech stock rout, cryptocurrencies were hammered with bitcoin plummeting to around US$42,200 at the time of writing, as what the Fed giveth, the Fed can also taketh.
Bitcoin has surged by over 500% since the end of 2019 in the wake of pandemic stimulus measures, but review of the Federal Reserve’s meeting minutes has spooked investors as the central bank appears to have turned decidedly hawkish.
Some analysts however still see pockets of opportunity against the broader rout in cryptocurrencies, with Fundstrat digital asset strategists Sean Farrell and Will McEvoy writing in a note yesterday,
“Given the current macro backdrop, leverage within the Bitcoin market, and recent robustness seen in the altcoin market, we think it’s appropriate to be overweight Ethereum and other smart contract platforms.”
“We probably would not bet the farm near-term on Bitcoin but think there is an opportunity in going long volatility via derivatives strategies.”
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Jan 06, 2022