US stocks start facing the impact of taper fluctuations and the EPS constraints of tax increases. In addition, the Biden administration has once again strengthened the antitrust system, and if the new bill falls, industries such as technology giants in the US may face subversive changes.
The Biden administration has not actively promoted infrastructure policies since April, mainly to prevent fuelling high inflation. Under the condition of deficit neutral, infrastructure and tax increase are bundled policies, and they need to be promoted at the same time, so the details of the tax increase policy have not yet been finalized. However, in view of the mid-term elections next year, Q4 infrastructure and tax increases must be implemented this year. If the fall in US stocks before next year’s mid-term elections is triggered by a fall in US stocks, it will not be conducive to the result of congressional re-election, and if it does not, it is failing to deliver on their campaign promises.
In terms of time, October-November is the key time to promote the combination of policies. The contradiction between rising risk-free rates and high valuations is not irreconcilable. If EPS is expected to continue to rise, investors are likely to ignore high valuations, but if EPS is lower than expected, higher risk-free interest rates will send US stocks into a phase of rapid valuation killing.
So once the tax increase is on the ground, US stocks are likely to retreat. The tax increase weakens the EPS of US stocks, and US stocks fall sharply under the resonance of high valuations and rising risk-free interest rates. However, we think that there will be a short-term sharp fall in US stocks after this tax increase, and provide base support for the rally of US stocks before next year’s mid-term elections.
Ahead of a potential November taper announcement in the FOMC this week, forthcoming discussions over raising the US debt ceiling and near-record China offshore HY bond spreads, global investors poured their second highest weekly amount into Global Equity ETFs (+US$52.7bn). The dichotomy of heightened risk appetite and peaking global GDP. Presumably with an eye on quarter-end performance and after a series of successive quarterly highs for indices such as the S&P 500 and MSCI All World, a sense of capitulation seems to have over-run investors. The fact that central banks are doing their utmost in delaying rate hikes thereby allowing inflation pressures to pervade even more may have also persuaded investors that “There Is No Alternative” to equities.
“Fear of missing out” is the enemy of valuing your own time. The sweeping change in sentiment comes at an interesting junction for global equities. Firstly, measures of risk appetite are decidedly mixed. However, these gauges are failing to pick up the tremendous impact that retail investors are having on risky assets with the traded volume of US single stock options at record highs while similar pictures are seen in Asian bourses. Secondly, global economic surprises have certainly peaked as has global GDP although earnings revisions have been exceptionally strong. However, companies are also experiencing strong credit rating upgrades, better dividend growth as well as share buybacks over the past six months.
15 September 2021, Microsoft Corp announced a new share buyback plan of up to US$60 billion. The company last announced a $40 billion buyback plan in September 2019. Microsoft Corp has about $130 billion in cash and equivalents on his balance sheet and continues to generate large amounts of cash, giving them “the strongest balance sheet in the software industry”. Microsoft Corp’s quarterly dividend could increase by more than 10%. If you add in EPS growth of about 17-19%, it will bring a total return of about 20% for investors.
Chinese policymakers have responded on two fronts: by speeding up economic growth where possible and the other – which is making all the headlines now, by rebalancing and spreading the gains among as many regions and people as possible. This is to ensure that the country can continue to create a big enough domestic market for sustainable growth.
Amid the selloff of Internet names, China’s ‘core technology’ industries have in fact rallied, as investors rotated to these. They are the industries identified as critical by the 14th Five-Year Plan, such as the EV supply chain, semiconductors and equipment, artificial intelligence, telecommunications, clean energy and defence. These are the areas with the potential for incremental growth for years to come.
While there are material risks from the recent changes and while the believes that more tax and welfare changes are afoot, the changes appear to be favourable for the further development of China’s middle class. To the extent that China succeeds in having 150-200mn more people entering its middle class, the risk-reward proposition of its market remains compelling. As the world’s second-largest economy that is also at the centre of the rise of Asia and the Asian middle class, China remains unstoppable, and unavoidable.
In June, Facebook CEO Mark Zuckerberg told his employees about an ambitious new initiative. “We will effectively transition from people seeing us a primary a social media company to being a Metaverse company. The future of the company would go far beyond its current project of building a set of connected social apps and some hardware to support them. Instead, he said, Facebook would strive to build a maximalist, interconnected set of experiences straight out of sci-fi — a world known as the metaverse.
The company’s divisions focused on products for communities, creators, commerce, and virtual reality would increasingly work to realize this vision, he said in a remote address to employees. “What I think is most interesting is how these themes will come together into a bigger idea,” Zuckerberg said. “Our overarching goal across all of these initiatives is to help bring the metaverse to life.
The word “Metaverse” is made up of the prefix “meta” (meaning beyond) and the stem “verse” (a back-formation from “universe“); the term is typically used to describe the concept of a future iteration of the internet, made up of persistent, shared, 3D virtual spaces linked into a perceived virtual universe.
Metaverse is the “ultimate form of the Internet”, is a very large concept.
Blockchain research experts believe that the metaverse is the highest form of human digital survival. In the metaverse, changes can experience a more complicated life. The metaverse is also a human society and a human world. In fact, it is a human virtual society and digital world.
Steven Spielberg’s movies in 2018 “Ready Player One” with background of the world in 2045, would give you a very good idea how Metaverse is like in our future life. Investors could explore further on this space.
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