Q1 2023 Review: So Far So Good, Despite Economic Volatility

2023 has been nothing short of spectacular, picking up right where 2022 left off. Within the span of a few months, we have experienced more crypto controversy, US-China tit-for-tat politics and the collapse of a 167-year-old Swiss banking giant, Credit Suisse. Investors must surely be wondering, despite all the doom and gloom, why have equity markets rallied this year? This year, both the S&P 500 and the Nasdaq 100 have rose 6.6% and 19.4% respectively. I believe that we are at the beginning of a new bull market and expect sustained equity gains following a strong start to the year.

A New Bull Market?

After underperforming the S&P in 2022, the tech-heavy Nasdaq index has outperformed in 2023, returning more than three times the S&P since the start of the year. This is unusual given the fact that tech stocks tend to be more interest-rate sensitive due to their higher valuation multiples. Despite US CPI being above 5% and the Fed announcing a quarter percentage rate hike in March, the Nasdaq has sustained its bullish momentum, reaching a 7-month high of $320.93 during last Friday’s close. $Invesco QQQ Trust(QQQ)$ daily chart indicates that the index has broken out of its downtrend and is trading above its 200DMA, a positive sign for the bulls. Despite this strong performance, not everyone has participated in the rally so far. Following the Silicon Valley Bank crisis, investors have been piling into cash and money market funds in search of a safe haven to park their funds. With ample dry powder available, equity markets could continue their strong momentum once investors rotate back into risk assets.

While there are concerns about the possibility of a recession in 2023, it is worth noting that the stock market tends to lead the economy. This implies that the stock market may have already bottomed as the economy enters a recession, and a new bull market could be around the corner. Historically, the finance, technology, and cyclical sectors tend to perform well at the start of a bull market, and this has been the case so far in 2023, as indicated by the year-to-date performance of the XLK (tech), XLY (discretionary) and XLC (communication) sectors. This reinforces my thesis that we are in the early stages of a bull market, and equities are poised for continued growth despite the possibility of a recession.

Stellantis

Delving into the specific stocks that I own, $Stellantis NV(STLA)$ is an auto company that is undervalued and has tremendous upside potential. The company was formed during a merger between Fiat and PCA group in 2021 and is currently the world's fifth-largest automaker. In addition to owning 16 well-known brands including Alfa Romeo, Chrysler and Jeep, the company has a bold strategic plan to double its revenues by 2030 and sustain double-digit Adjusted Operating Income margins throughout the decade. Dare Forward 2030 is Stellantis’ plan to achieve carbon net zero by 2030 and to capitalise on the rising popularity of Electric Vehicles. Stellantis is just trading at 1.69x EV/EBITDA with a Free Cash Flow yield of 15.5%. I have a price target of $22 for the company, implying a 20% upside from current prices.

Microsoft

Artificial Intelligence (AI) has been the buzzword of 2023, with OpenAI’s ChatGPT taking the world by storm since its introduction. Generative AI is now being touted as the next frontier of growth due to its ability to provide constructive feedback and suggestions to increase productivity. Software giant, $Microsoft(MSFT)$ unveiled that its search engine, Bing would incorporate ChatGPT to provide suggestions for search queries. Yet this feature only scratches the surface of AI’s newfound capabilities. Microsoft is rolling out another feature, Copilot which basically serves as a virtual assistant to organise files, analyse data and much more. Copilot will greatly reduce the amount of time users spend processing data and generating content, increasing productivity across enterprises. AI is not without its critics and none are more famous than Elon Musk. Musk tweeted that OpenAI was meant to be a non-profit company to serve as a counterweight to Google, but has become a closed-source, maximum-profit company effectively controlled by Microsoft. Whether you agree or disagree with Musk that AI should not be controlled by a business organisation, you should recognise the potential of AI to drive productivity across the corporate workplace. As we struggle with demographic challenges and ageing populations, AI could be the key to solving these issues. Hence, my investment thesis for Microsoft is centered around the ownership of shares in a software provider that has the potential to become an essential component in the operation of businesses and the broader economy.

Alibaba

The last company I will talk about is $Alibaba(BABA)$. It was recently announced that Alibaba will be splitting into six companies, each with the ability to raise outside funding and go public. According to the company, this move is “designed to unlock shareholder value and foster market competitiveness.” I feel encouraged by Alibaba’s decision to split its company as tough regulation from Beijing has made it difficult for Alibaba to grow its business. Spinning out the companies would therefore allow each business to pursue its own strategy and allow shareholders to choose which business to invest in. While I believe that Alibaba’s shares are currently undervalued and hence why I own them, I am likely to sell my shares once the split has been completed. The reason behind this is that several of the businesses are in the Chinese e-commerce and logistics sectors which are extremely competitive. As an investor, one of the main things I look out for is a company’s competitive moat. Given the crackdown by Chinese regulators on Alibaba’s business, I believe that its competitive moat has been eroded making it an unattractive business to own in the long term. According to JP Morgan, Alibaba’s sum of the parts valuation could be worth around $210 per share, implying more than a 100% upside from current prices. Hence, I intend to leverage the favourable market outlook on Alibaba's split to divest my holdings at a premium valuation.

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