2023 Mid Year Recap: The stock market rally marches on

US stocks continued where they left off in Q1 2023, posting strong gains despite a hawkish tone from the Fed. The S&P 500 Index is now up over 15% year-to-date with the US economy yet to show any signs of a recession. The US economy grew at an annualized rate of 2% in Q1 2023, well above forecasts of 1.4%. Consumer sentiment remains strong, while jobless claims continue to tick lower indicating a resilient economy backed by a tight labor market. Inflation now stands at 4%, the lowest since 2021 as energy prices continue to experience a decline. The Fed has indicated that it is keeping the door open to more rate hikes with some members arguing that the current Fed Rate “should be sufficient to move inflation toward the 2% target over an acceptable time frame. Since inflation is now below interest rates, it is highly appropriate for the Fed to take its foot off the gas and drop its hawkish stance. This would likely have a positive impact on risk assets leading to a prolonged rally among US equities.

United States Inflation Rate / Interest Rate Spread

I have taken the stock market rally as an opportunity to rebalance my equity portfolio, trimming stakes in $Meta Platforms, Inc.(META)$ while adding to the semiconductor space ( $Advanced Micro Devices(AMD)$ and $Micron Technology(MU)$. As we continue to experience a global economic recovery, I have also added to my position in $Vale SA(VALE)$, believing that rising global demand will lead to higher commodity prices. In the next few sections, I will share my rationale behind these portfolio adjustments.

Meta

Meta has performed extremely well since the start of the year, gaining over 133% YTD. Meta’s outperformance can be attributed to stronger-than-expected advertisement spending and greater operating efficiency. AI has also contributed significantly to investment returns. Meta has set up its own AI lab, Meta AI which intends to develop various forms of artificial intelligence, improving augmented and artificial reality technologies.

However, after the huge run-up in price, Meta is no longer cheap from a valuation perspective. Trading at 17x EV/EBITDA, Meta is now trading at multiples higher than its historical average (15x EV/EBITDA). For a company that still faces competition from TikTok and other forms of social media, Meta should not command such a high valuation in my view. Therefore, I am using this chance to trim my position in Meta, having gained over a 40% return on my initial investment

Meta is no longer cheap from a valuation perspective

Semiconductors

Semiconductors are a significant enabler of AI as increasing demand for computational power and specialized hardware creates opportunities for growth within the space. Two companies that supply the chips essential for AI and ML applications are AMD and MU. AMD produces high-performance CPUs and GPUs that power desktops, laptops and servers while Micron manufactures memory chips catering to a wide range of industries including computing, data centers, mobile devices, automotive and IoT.

Recently, chip stocks have pulled back on fears of geopolitical US-China tensions. I see this as an attractive opportunity to enter long positions in AMD and MU. AMD is a more short-term position as it is still an expensive stock to own and I am playing for an oversold bounce with a price target of $130.

MU is a better investment in my opinion and I am adding to my long-term position in MU stock. The DRAM industry is highly oligopolistic and cyclical. Coupled with the prospects of growth from AI, MU will be able to grow its earnings power through its wide economic moat.

Vale

Recession fears have been overstated and major economies are faring better than expected in the face of hawkish central banks. For example, the US economy remains strong and recently experienced a significant jump in housing starts, suggesting that the housing market is stabilizing and demand for homebuilding is increasing. On the contrary, momentum in China has yet to pick up with producer price increases continuing to slowdown. In an effort to bolster spending and investments, the PBOC has slashed its lending rate with the LPR lowered to 3.55% in June.

While developed markets (DM) equities have rallied on the hopes of a global economic rally, investor optimism has not yet spread to emerging markets (EMs) which are still very cheap in comparison to their DM peers.

EM valuations are cheap compared to DM peers

As inflation continues to fall and the Fed prepares to cut interest rates, LATAM equities provide attractive investment opportunities due to their large exposure to commodities. Rate cuts would lead to a weaker dollar and higher demand for commodities, benefiting producers such as Vale.

Conclusion

In summary, these are the 3 adjustments I made to my investment portfolio:

1. Trimmed stake in Meta by 30%

2. Added long positions in AMD and MU

3. Increased position in Vale by 25%

The rationale for these changes was to take profits in sectors that have experienced a large price increase while adding to sectors that are cheap and have huge potential for growth. I anticipate a sustained global economic recovery that benefits cyclical sectors such as chips and materials and could catalyze earnings growth. Therefore, I am anticipating a change in market leadership from tech stocks to cyclical stocks and have a favorable view on semiconductors and commodity producers.

@TigerStars @CaptainTiger @TigerEvents