Barron’s Weekend Summary: China's cheap electric vehicles (EVs) pose no threat to US automakers like Tesla, Ford, and GM
Cover:
-China's cheap electric vehicles (EVs) pose no threat to US automakers like Tesla, Ford, and GM, but better vehicles might pose a problem. The Seagull, a cute four-door hatchback priced at $10,000, is a popular choice among Chinese automakers. The Biden administration raised tariffs on Chinese EVs to prevent them from crushing the US auto industry. A 100% import penalty will be imposed on EVs like the BYD Seagull, while select batteries and battery components will be hit with a 25% levy. Donald Trump has pledged even higher tariffs. The penalties effectively block Chinese companies from bringing their cars to America and prompt US auto makers to invest in domestic EV component manufacturers. China is now the largest market for new cars and EVs, and even US auto executives, including Tesla CEO Elon Musk, extol Chinese automotive quality and innovation. However, cheap vehicles pose no threat to US manufacturers, and American automakers must use the time to design and build affordable electric vehicles or risk seeing history repeat itself.
Interview:
-Solita Marcelli, now the chief investment officer for UBS Global Wealth Management, has experienced numerous career crises. She began her career as a technology equity analyst in the early 2000s, and soon joined JP Morgan's emerging markets fixed-income team. The global financial crisis roiled the bond market, and the Covid pandemic hit just three months after her hiring. Marcelli learned the importance of staying close to businesses and entrepreneurs, as data often offers insufficient information for decision-making. Conversations with UBS' high-net-worth clients, including restaurant franchise owners and furniture company executives, have confirmed her bullish view of U.S. stocks, especially technology shares, but also increased her focus on hedging positions. Marcelli's soft-landing economic forecast and market outlook are discussed in a Barron's interview.
Tech Trader:
-The world is investing heavily in Nvidia's artificial intelligence (AI) factories, with investors pushing its stock above $1,000 and data center builders increasing their spending five-fold in the company's latest quarter. The expected return on investment (ROI) for AI is unknown, but it is estimated to be 50%. Corporations and countries are refitting $1T worth of data centers with accelerated computing from Nvidia, with data centers earning $5 over four years for every dollar invested in Nvidia computing and networking products. However, real calculations of ROI are difficult due to the secrecy of competing firms and the newness of AI learning models. Marketed products based on OpenAI's ChatGPT or Google's Gemini are few, and Microsoft charges $10 to $30 a month for its Copilot virtual assistant. Netflix, Amazon, and Google use AI internally to determine what they present to their searching audiences, but this is a cost of doing business, not individually priced products.
The Trader:
-Memorial Day is here, but the market outlook is uncomfortably hazy. Despite recent volatility, the Dow Jones Industrial Average is up over 3% this month, while the S&P 500 index and NASDAQ Composite have gained 5% and 8%, respectively. However, the past week's wild swings, including Nvidia's strong earnings, have not prevented the Dow from losing over 2%. This coming week will not offer much to change the narrative, with earnings releases from Costco Wholesale, Salesforce, HP Inc., and Dell Technologies. Investors will also be able to digest the latest consumer confidence report, the Federal Reserve's Beige Book, weekly jobless claims, and a revision of first quarter gross-domestic product. The government's personal income and outlays report for April, which includes the latest PCE price index reading on inflation, will be released on Friday. Dan Genter, CEO and chief investment officer of Genter Capital Management, suggests that the Fed won't be easing monetary policy anytime soon, as the core number is expected to rise 2.8% year over year, unchanged from the previous month.
-Keurig Dr Pepper's shares have only gained 2.9% this year, underperforming larger rivals Coca-Cola and PepsiCo, which are both up about 7%. However, this could change as new management aims to shake up the underperforming coffee business. Keurig Dr Pepper owns Dr Pepper and other beverage brands, including 7UP, Hawaiian Punch, Snapple, and Yoo-Hoo, which are part of the company's U.S. "refreshment beverages" business. Sales rose more than 4% in the first quarter due to price increases. However, the company also owns the Green Mountain Coffee Roasters line of single-serve K-Cups for Keurig coffee makers, where sales fell more than 2% due to lower pricing and a decline in K-Cup pod shipments. Tim Cofer, previously the CEO of Central Garden & Pet and a 25-year veteran at Mondelez International/Kraft Foods, is expected to push coffee initiatives started by his predecessor, Bob Gamgort, to reignite growth in the business.
Features:
-Target's reputation as Walmart's more posh counterpart has made it a reliable shopping destination for middle-class Americans and a boon to the company's financial performance. However, with inflation squeezing household budgets, the company's cultivated aura of big-box exclusivity may be hurting its financials more than it is helping. As customers are looking for better value to stretch a dollar, they are finding it other places. Target's fiscal first-quarter earnings report showed a missed earnings estimate and a year-over-year sales decline, while competitor Walmart beat expectations due to its growing market share gains among higher-income customers. Target may need to take a page out of Walmart's book and position itself as a value-centric retailer to win back shoppers.
-GE Vernova stock has seen a significant increase, with its shares up 34% since being spun off from GE in mid-March. The company's shares have risen 8.6% on Friday, indicating a strong performance from the two GE companies. The Dow Jones Industrial Average has risen 0.1% on Friday, while the S&P 500 is up 0.7%. This indicates that low valuations and lower expectations remain a significant factor on Wall Street. Wall Street is raising price targets for GE Aerospace and GE Vernova, the power generation-related business, as both stocks have been successful since GE broke up. JP Morgan analyst Mark Strouse raised his price target for GE Vernova to $173 a share, keeping a Buy rating on the shares. GE Vernova stock closed at almost $164 a share on Wednesday, about $1 above Strouse's former price target. Aerospace, the former GE's business portfolio, is expected to be the better business, with strong margins and unassailable market share.
Europe:
-The European Central Bank (ECB) is expected to lower borrowing costs at its next meeting on June 6. The central bank, responsible for setting interest rates for 20 euro-using countries, has historically been slower to pivot than the Federal Reserve or the Bank of England. Euro-zone inflation held steady at 2.4% in April, near the 2% target, and ECB President Christine Lagarde has communicated that a cut is likely in June. However, moving first to control inflation and start the rate-cutting process brings risks, including currency weakness. Lower rates typically diminish a currency's relative value by making foreign investment less attractive. The euro has already fallen 1.6% to $1.09 in 2024 as the market believes the ECB will cut before the Fed.
Emerging Markets:
-Georgia's Prime Minister Irakli Kobakhidze has said an EU commissioner warned him of an assassination bid over a controversial law. Kobakhidze claimed on Thursday that the Commissioner was Olivér Várhelyi of Hungary (though probably not a supporter of Viktor Orban). The bill requires NGOs and media outlets with over 20% of their funding from abroad to register as bodies "pursuing the interests of a foreign power". Critics argue the measure mirrors Russian legislation used to stifle dissent, while Brussels warns it is incompatible with Tbilisi's longstanding bid for European Union membership. The ruling party has faced accusations of derailing the country from its EU membership path and leading it back towards the Russian orbit. The party insists it is committed to EU and NATO membership, which are enshrined in the country's constitution and supported by over 80% of the population. The party has repeatedly accused Western countries of attempts to drag Tbilisi into Russia's war on Ukraine. Kobakhidze called a "horrific threat", he quoted the commissioner as saying: "You've seen what happened to (Robert) Fico and you must be very careful."
--China's economy and property market are facing challenges due to a slump in housing prices since 2021, which has led to a freeze on spending. Consumer sentiment and real estate are suffering, with new home prices falling for a tenth consecutive month by 0.6%, the fastest decline since November 2014. China recently unveiled "historic" policies to rescue the housing sector, including measures to boost property prices, asking local governments to buy unsold homes from distressed developers, and easing rules on purchases. However, analysts say that local governments are vastly in debt across the country, making some of these steps likely to be ineffective.
Commodities:
- Commodities are experiencing a decline, with gold and silver experiencing their largest decline in a month. Copper is also down for its second consecutive session. This comes after a surge in prices this year, reflecting higher demand and tighter supply. Gold has already reached 22 record highs this year, while silver reached its highest value in over a decade earlier this week. Copper hit a record price of $5 a pound on Tuesday. In the agricultural market, inventories are tight for wheat due to production declines in Russia, the world's largest exporter. Soybean and corn prices have come under pressure, but analysts are watching for a spate of bad weather across the Midwest that could raise prices again. The commodity bull market is alive and well, with more upside. Retail investors should stick to the classic 60/40 portfolio of stocks and bonds, as commodities are speculative assets and are almost entirely at the mercy of supply and demand.
Streetwise:
-Alphabet is integrating generative artificial intelligence into its core search business, which could potentially change the rules of getting noticed online. Audience engagement experts have long explained that algorithms, relevance ranking, and clicks are important, but with AI, clicks might become less important. Google claims they won't, but it's unclear if they're talking from both sides of their Google hole. For example, Google's search results for a user asking which sneakers are best for a 51-year-old man might include paid links, product listings, pictures, and prices. However, Perplexity.ai, a small start-up, is taking on Google's near-monopoly in search. The company offers bullet points on how to complement a user's mature style, emphasizing cushioning and avoiding flashy colors, and specific model recommendations, but no endless list of links, paid or not.