Cover:
-Investors are focusing on U.S. stocks, creating a dangerous blind spot and missing opportunities to invest in companies that have fueled the U.S. bull market. China's economy is sputtering, and Beijing's efforts to revive it are underwhelming. China is leaning on exports for growth, triggering a wave of protectionism and reshuffling of trade flows as countries try to protect domestic industries. International markets have been in a deep funk, with the S&P 500 index returning an average annual 13% over the past decade. However, the shifting geopolitical and economic forces abroad, including the fraying US-China relationship, changes in China's economy sparking new tariff threats, and the fallout from the wars in Ukraine and the Middle East, create challenges for global giants. Barron's convened four global market watchers on Nov. 21 for a virtual journey around the world and found a relatively upbeat outlook for globe-trotting stockpickers. They found a dozen stocks and notable shifts that will affect all types of portfolios.
Interview:
-No interview this week
Tech Trader:
-Intel's CEO, Pat Gelsinger, stepped down on Monday, leaving the company with no successor in place. The stock initially rallied 6% but lost 13.2% over five trading sessions. Intel's long-term health may be at odds with short-term demands of investors. Intel's main problem is losing chip manufacturing technological leadership to Taiwan Semiconductor Manufacturing in 2018. Gelsinger's main goals were to re-establish tech leadership and accept third parties as manufacturing customers. However, the plan has not produced much, and Intel has been forced to turn to TSMC for some chips. The company continues to rely on its own manufacturing lines, which are due to launch in mid-2025. With Gelsinger's resignation, Intel now has two interim CEOs, and the company is working to find a permanent successor. The board of directors has formed a search committee to find a permanent successor, but the short-term demands of investors may be at odds with the long-term health of the company.
The Trader:
-Housing stocks have not seen the expected boost from the Federal Reserve's interest rate cuts this year, with the iShares US Home Construction exchange-traded fund falling 4.1% since the Fed first moved on Sept 18. This is due to the spike in long-term bond yields and mortgage rates during the Fed's interest rate cuts. Treasury yields have started to recede ahead of the Federal Open Market Committee meeting, which could lead to a dip in mortgage rates, which would be beneficial for prospective homebuyers and investors in housing-related stocks. The housing sector needs support as home sales have been sluggish for two years due to affordability concerns. The 30-year mortgage rate hit its highest level since 2000 in November 2023, dampening buyer interest. However, there are signs of a turnaround, with pending home sales rising in October and existing home sales increasing for the first time since July 2021. Nick Frelinghuysen, co-chief investment officer of equities at Chilton Trust, believes that there will be a rebound in 2025 due to pent-up demand for new construction and housing. Frelinghuysen is betting on the potential rebound through builders and retailers with close ties to housing, including Lennar.
-Verizon Communication has had a subpar 2024, but next year looks more promising. While Verizon's stock has increased by 13%, it has lagged behind the broader market and its top telecom rivals. The S&P 500 has gained 28% this year, AT&T has surged 40%, and T-Mobile has soared more than 50%. However, Verizon is expected to grow its revenue and earnings in 2025 at a slightly faster clip than AT&T, which offered upbeat guidance at its annual investor day presentation. Analysts are forecasting a 2% bump in sales and 3% increase in earnings for Verizon next year, compared to 1% gains in profits and revenue for AT&T. Despite this, Verizon trades at nine times 2025 earnings estimates, a small discount to AT&T's valuation of nearly 11 times next year's profit projections. The best news for Verizon investors is that the company no longer needs to offer aggressively discounted plans to entice people to sign up. Morningstar analyst Michael Hodel believes that pricing discipline will drive most of Verizon's growth, calling it the most attractive of the three major US wireless carriers.
Features:
-General Motors has announced a $2.8B loss in its Chinese venture and plans to incur another $2.7B in equity losses as it restructures the business. The company has been experiencing a persistent decline in China sales since 2017, with a loss of $137M in Q3 2024. GM CEO Mary Barra has stated that the company and its Chinese joint-venture partner, SAIC, are taking steps to ensure sustainable growth in China. However, restructuring may not be enough to reassure investors, as other companies, like Uber, have found the best way to reassure investors is to take China out of their long-term strategy entirely. GM, which entered the Chinese market in 1997 through a joint venture with SAIC Motor, has spent decades attempting to master the Chinese automobile market. In 2010, GM sold over 2.35M vehicles in China, surpassing its US sales. China sales peaked at over 4M vehicles in 2017, but have since declined. In 2023, GM sold 2.1M vehicles in China. Several factors contribute to GM's declining sales in China, making it difficult for the company to reverse the trend.
-The Department of Government Efficiency (DOGE), led by entrepreneur Vivek Ramaswamy, plans to save hundreds of billions of dollars from efficiency improvements to entitlement programs like Social Security and Medicare. Ramaswamy emphasized that many of these funds are not being used as intended, and that there are hundreds of billions of dollars of savings to extract from basic program integrity measures. The government's own accounting shows that major entitlement programs make tens of billions of dollars in "improper payments," but the total amount is less than what appears. In the 2024 fiscal year, the Centers for Medicare & Medicaid Services made about $87.1B in improper payments, while the Social Security Administration had a backlog of cases resulting in projected improper payments of $1.1B. In total, federal agencies made an estimated $236B in improper payments across 71 programs. Ramaswamy believes that hundreds of billions of dollars are not being spent in the way the law dictates in major entitlement programs.
Europe:
-France has experienced political chaos following a motion of no confidence against the government in Parliament. The fallout is expected to remain complicated, but markets have absorbed the news slightly. Stocks rose and bond yields were little changed on Thursday, as the fallout was largely priced in already. The CAC 40 index was up 0.2% and has gained almost 2% over the past five days. Government bond yields have been increasing their spread from German yields to the most in a decade over the past few weeks. The euro bought $1.0545, up 0.3% on the day. Traders have been discounting French assets for a while, with the CAC losing 3.1% this year compared to a 28% gain for the S&P 500 and a 21% increase for Germany's DAX index. France's political and economic backdrop remains shrouded in uncertainty, with thousands of companies offering diversification to a broader portfolio. Germany's coalition collapsed last month, forcing new elections in February. France may be in limbo for a bit longer, as President Emmanuel Macron called early elections for the legislative branch earlier this year, which backfired and his party came second.
Emerging Markets:
-South Africa's Government of National Unity (GNU) has maintained its stability for nearly half a year, leading to a 17% increase in the iShares MSCI South Africa exchange-traded fund and a two percentage point decrease in yields on 10-year sovereign bonds. The GNU joins the African National Congress (ANC) with the Democratic Alliance, a white-dominated, pro-business group. The GNU has consolidated some of the previous government's better policies and changed the PR a bit. The GNU has also passed 250 days without blackouts from national utility Eskom. However, investors are divided on how far the rally can run without more substantial achievements. Official unemployment is above 30%, and investment in the mining sector has dwindled due to bureaucracy. South Africa has fallen to a third-tier mining destination with an anachronistic approach to regulation. However, optimists believe that continued improvements can go a long way. Power provision has improved due to ad hoc creeping privatization, with businesses and households running Eskom with their own solar panels.
Commodities:
-Gold has seen a surge in popularity this year, but its appeal has waned since the election. President-elect Donald Trump's embrace of Bitcoin and Federal Reserve Chair Jerome Powell's comments on Bitcoin's virtual and digital nature could be a concern for gold. Some analysts believe gold could lose appeal in the coming year as investors and the federal government continue to embrace Bitcoin. Rep. Sen. Cynthia Lummis introduced a bill in July calling for the Treasury Department to buy one million Bitcoin over five years and hold them in a Strategic Bitcoin Reserve. This bill also suggests that Federal Reserve regional banks could sell some gold holdings and use the proceeds to purchase Bitcoin. As a result, gold prices have fallen about 3% since Election Day, while Bitcoin has soared more than 30% to above $100,000.
Streetwise:
-Intel is facing a difficult turnaround attempt in 2024, with shares down 52% year to date and CEO Pat Gelsinger's departure. Stellantis is a close second, with its own CEO exit. The company's problems seem to lock each other into place, as it designs and manufactures chips, two different jobs. Intel is losing market share in servers and personal computers to Advanced Micro Devices and Taiwan Semiconductor Manufacturing. To fix this, Intel plans to build new factories to take on Taiwan Semi in contract chip fabrication and race through its own new chip designs to recapture the lead from AMD. However, the cost has taken Intel from generating $38B in free cash to likely burning close to $25B between last year and this year. It is unclear if Intel's rivals in chip design will be comfortable relying on Taiwan Semi for their manufacturing.