The dramatic underperformance of Chinese stocks in recent years has pushed many global asset owners to conclude that the country is virtually uninvestable. This week’s surprise announcement of aggressive fiscal and monetary policy action is spurring a reappraisal of that view. Billionaire hedge fund founder David Tepper, and owner of Carolina Panthers, said his big bet after the Federal Reserve’s rate cut was to buy Chinese stocks. “I thought that what the Fed did last week would lead to China easing, and I didn’t know that they were going to bring out the big guns like they did,” Tepper told CNBC’s “Squawk Box” on Thursday. “And I think there’s a whole shift.” "Everything, everything, everything… ETFs, I would do futures, everything, everything". He's one of the most successful investors in history. He continued making his case by saying, "a long time ago in 2010 I think I said everything, and you know what was good, everything." Continuing on China, Tepper said, "This is incredible stuff for that place. So it's everything. I would like to see a pullback… I would have another newfound limit in a pullback." “We got a little bit longer, more Chinese stocks,” Tepper continued. “And so, I have limits, historic limits. I probably said a long time ago, I don’t go above 10% or 15%. Well, that’s probably not true anymore.” In fact, the founder of Appaloosa Management said he may have doubled his limit to China equities, saying he bought more of “everything” such as large-cap tech giants Alibaba and Baidu after the U.S. lowered interest rates earlier this month. “They promised to do more and more and more. OK? And that’s very strange language, especially for, you know, any central banker, but especially over there,” Tepper said. “And last night, you know, we heard that they were going to have some kind of meeting, but they kind of blew away expectations on the fiscal stimulus.” To be sure, rising geopolitical concerns including further tariffs between the U.S. and China have spooked many investors away from the China market. However, Tepper dismissed those risks. “My counter bet is that I don’t care,” he said. We do not see a stronger Chinese economy as a threat to US inflation or economic growth unless oil prices surge. As noted above, there are no signs of that occurring just yet. We therefore remain positive on US equities. The Newton Group portfolios benefitted as this interview was airing as we have exposure to Alibaba, industrials and materials, as well as Louis Vuitton which benefits from Chinese luxury buyers. I agree with David Tepper. The stimulus move in China was a major macro event that will be a tailwind for global markets.
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Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(+) Accenture (ACN-US) reported a slight EPS beat driven by better-than-expected revenue growth in Q4. The company also introduced Q1 top-line guidance, which was better than consensus expectations, while the mid-point of FY guidance came in slightly below consensus. Despite continued near term headwinds from a more subdued IT spending environment, the company remains well-positioned long-term to benefit from the secular growth of IT spending. Given its broad exposure across end markets and geographies, and its ability to deliver a wide range of consulting and implementation services, ACN provides a vendor/technology-agnostic exposure to participate in what we view as an attractive secular growth theme. Moreover, the company has an experienced management team, a clean balance sheet, and generates strong free cash flow. Owned in US Portfolio.
(-) Costco (COST-US) reported a mixed quarter with a slight revenue miss and EPS beat. Given that the company reports monthly SSS, the focus in our view should be on the margin delivery, which exceeded consensus expectations in the quarter. COST’s share price is up 37% year-to-date, outperforming the S&P 500 owing to high membership-renewal rates, and steady sales growth. Rising inflation has led to consumers looking for lower-priced groceries and home goods. Moreover, membership fees account for over 70% of COST’s total operating profit, allowing the company to undercut retailers on price. Owned in Core, and ESG+ Portfolios.
(+) Fortis (FTS-T) Our income stream just grew by 4.2%. Looking ahead, FTS expects the rate base growth to compound by 6.5% per annum through 2029. This in turn provides support to the existing dividend growth guidance of 4-6% per annum over the same time frame. Net net, we view FTS as a best-in-class Canadian regulated utility asset and is appropriate to own in dividend-oriented portfolios. Falling rates have allowed for valuation expansion, but shares are still trading at a slight discount to its 5-year average of ~19x forward P/E. Owned in cash Flow Portfolio.
(+) Meta Platforms (META-US) CEO Mark Zuckerberg showcased a slew of new augmented reality products and artificial intelligence updates at the Meta Connect 2024 event. The main highlight was the Orion prototype, which Meta claimed to be its "first true holographic augmented reality glasses." Zuckerberg also unveiled a cheaper version of its virtual reality headset called Meta Quest 3s at a price of $299 and new celebrity voices for its AI assistant. AI updates to the Ray-Ban Meta glasses were additionally teased, as well as upcoming partnerships with Spotify and Amazon Music to improve the audio content experience. The statistics provided by the company around its AI tools and new products announced at the Connect event mark slight incremental positives and reinforces our overall positive thesis on the shares. META continues to be dominant in online advertising globally and remains in the enviable position of being able to monetize multiple attractive assets which we believe should support sustainable revenue growth longer-term. META is up 61% year-to-date, outperforming the S&P 500. The stock trades at a forward P/E multiple of 24.2x, a discount to its historical long-term average of 24.8x. Owned in Core, ESG+ and Opportunity Portfolios.
(sold) Super Micro Computer (SMCI-US) experienced renewed selling pressure after the Wall Street Journal reported an early-stage investigation into the company by the Department of Justice (DoJ). The probe appears to be related to a report released by my high-profile short-seller outfit Hindenburg Research last month and a whistleblower lawsuit filed in April. As of today, the company has neither addressed the allegations raised in the report nor filed its annual report on form 10-K with the SEC. Without audited financials, raising billions of dollars in required working capital could prove difficult. As a result, the company could be at risk of losing substantial market share to competition. Given this issue, we have moved to the sidelines. Was owned in Opportunity Portfolio.
(-) Visa (V-US) The US Department of Justice has filed an antitrust lawsuit against Visa accusing V of illegally maintaining a monopoly over its debit network and using that to stifle competition and innovation. The Department of Justice proposes a number of measures to prevent Visa from continuing to engage in anticompetitive practices. While Visa has a long track record of navigating through regulatory uncertainty and we believe the company will ultimately be able to steer through this most recent challenge, the DOJ lawsuit introduces an incremental headwind that will likely weigh on the shares in the near term. Visa authorized the deposit of $1.5B into its litigation escrow account that was established under its U.S. retrospective responsibility plan, the card network company disclosed on Thursday. Given Visa’s 60% market share in US debit vs. Mastercard’s 25%, any resolution is likely to be incrementally positive for Mastercard. We continue to recommend holding the shares. Owned in Core, ESG+, US and Cash Flow Portfolios.
Company of the Week: META
Meta Connect 2024: Everything Revealed in 12 Minutes
Weekend Reading
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“Both optimists and pessimists contribute to society. The optimist invents the aeroplane, the pessimist the parachute.”
- George Bernard Shaw