Barron’s Weekend Summary: President Joe Biden needs to convince voters that higher inflation and interest rates are not a blight on his presidency
Cover:
-President Joe Biden needs to convince voters that the economy is strong and that higher inflation and interest rates are not a blight on his presidency. Bidenomics, which includes the Bipartisan Infrastructure Deal, the Inflation Reduction Act of 2022, and the Chips and Science Act of 2022, has led to over $1T in economic stimulus through subsidies, tax breaks, and financial incentives. Despite political rhetoric, the economy is hardly ailing, with unemployment near record lows and gross domestic product expanding more than 3% a year on average over the past three years. Biden's policies coincided with the rise of artificial intelligence, tech investment, and pent-up demand after the pandemic-induced slowdown. Biden's legacy will persist, particularly with a climate package designed to supercharge the U.S.'s clean-energy transition.
Interview:
-Masakazu Takeda, portfolio manager for the Hennessy Japan fund, believes this year's Japan rally is well-founded, given the country's ongoing efforts to improve profitability and efficiency. Hennessy Japan has outperformed peers and the Nikkei in the past 12 months and over the past 10 and 15 years, according to Morningstar. Takeda's recent interview with Barron's reveals why he has turned bullish and what he is buying now. Japan's stock market has seen a significant recovery, with the benchmark Nikkei 225 index achieving a 16% year-to-date increase, ahead of the S&P 500 index's 9% return. This is due to Japanese companies' efforts to improve profitability and efficiency, as well as increased investor activism and Warren Buffett's surprise visit to Japan in 2023.
Tech Trader:
-no update this week
The Trader:
-The stock market appears to be moving at a steady pace, with the S&P 500 index up 9% this year after a third consecutive weekly gain. However, a new set of stocks has been leading the charge, benefiting from higher expectations of lower interest rates. The financials-heavy Dow Jones Industrial Average is beating the tech-heavier S&P 500, rising eight days in a row for the first time since December. The Dow is now 0.7% off its all-time highs, just 25 years after the publication of the book Dow 40,000: Strategies for Profiting from the Greatest Bull Market in History. The Dow streak is not record-breaking, but it's a good sign. Tried-and-true Dow stocks have been outpacing tech names, with Goldman Sachs Group outpacing Nvidia by 15 percentage points in the past month. Utility stocks have been the best performers, with the Utilities Select Sector SPDR ETF going on a seven-day winning streak. Investors are looking forward to the Federal Reserve cutting rates, although the central bank has given few explicit signs of cuts.
- Canada, with the world's third-greatest oil reserves, has been unable to capitalize on its underground resources due to a lack of pipelines to transport oil to markets. The Trans Mountain Pipeline, a government-owned project from Alberta to Vancouver, has started operations after seven years of waiting. The new infrastructure will triple capacity, allowing Canadian producers to ship an additional 590,000 barrels of oil per day to customers. This will allow Canadian producers to ship their oil to Asia or customers on the West Coast of the U.S., reducing the cross-border embarrassment of selling oil at a discount to U.S. refineries. The spread between U.S. and Canadian oil prices has shrunk to $13, and some analysts believe it will eventually slip into the single digits. The Permian Basin, the center of shale-drilling in the U.S., has experienced growth constrained by a lack of pipelines, similar to Canada's tar sands area. However, several producers should still benefit from the pipeline network expansion.
Features:
-A solar storm has reached Earth, and this has some implications for investors. The National Oceanic and Atmospheric Administration (NOAA) warned of a likely "severe geomagnetic storm," which can interfere with communications and potentially impact the power grid. Investors can take precautionary steps, as outages can impact utility companies' shares, but they typically recover after acute problems. A severe 2021 winter storm in Texas resulted in heavy power outages, introducing volatility into shares of NRG Energy and Vistra. Shares of generator manufacturer Generac also tend to be volatile around hurricane season, with high dealer inventories impacting production and earnings for over a year. Schneider Electric, an electrical component and software supplier, believes that technology can help mitigate the worst impacts of extreme weather, using artificial intelligence to predict weak points and distributed generation assets to improve grid resilience.
-The Biden administration is considering quadrupling the import tariff on Chinese-made electric vehicles, potentially increasing it to around 100% from 25%. This would provide US producers with more protection, but the stock of US car makers is falling due to the uncertainty. The Chinese auto industry is the world's largest market for new cars and electric vehicles, processing most battery materials. The existing 25% tariff only affects Lotus Technology and Polestar Automotive, which make their EVs at facilities in China owned by car maker Geely. Rising tariffs would be most hurt by these companies, which sell high-end EVs. However, the impact on the overall US EV market will be small, as Polestar delivered 2,210 cars in the first quarter for a market share of 0.8%. Ford Motor, General Motors, and Tesla would likely benefit the most from additional protections as big US auto makers.
Europe:
-The Bank of England (BOE) has kept interest rates on hold, with the first cut expected to occur in June. BOE policymakers stopped raising interest rates last year and have kept them unchanged ever since. The UK's falling inflation rate could allow the BOE to lower borrowing costs sooner than the Federal Reserve. Two out of nine members of the Monetary Policy Committee voted to lower interest rates this month, suggesting a shift in sentiment. The next BOE meeting is scheduled for June, with another decision due in August. The market is pricing in a first cut around September for the Fed. BOE Governor Andrew Bailey said a change in bank rate in June is neither ruled out nor a fait accompli. The possibility of a divergence from the US comes as the BOE updates its forecasts for economic growth and inflation.
Emerging Markets:
-Saudi Arabia has become one of the world's fastest-changing societies under the leadership of Mohammed bin Salman. Under his leadership, female employment has doubled and entertainment and leisure industries have sprung to life. The Saudi Exchange has hosted 70 initial public stock offerings since early 2022, with 50 years of progress in the market. Riyadh is dangling enhanced defense cooperation with the U.S., keeping China as its biggest oil customer, and restoring diplomatic relations with regional rival Iran. Careful investors can capitalize on this positive momentum, as they are looking for companies that can crank out double-digit earnings growth. The International Monetary Fund projects Saudi Arabia's non-oil economy to grow by 4% annually this decade. Shares in gym operator Leejam Sports and IT consultant Elm Co. have soared over the past 18 months.
Commodities:
-The oil industry is experiencing a surge in mergers and acquisitions, with companies like Exxon Mobil, Chevron, Diamondback Energy, and Occidental Petroleum announcing transformative oil deals worth over $150B. British oil giant BP is also considering an acquisition, but not an oil company. BP is considering buying something in the low-carbon industry, possibly in an area like biofuels. This comes as BP has pulled back on some of its existing low-carbon efforts amid weakening returns. BP CEO Murray Auchincloss said that the company wasn't planning to go in that direction due to high oil prices. However, the company has been adding low-carbon assets at a time when solar and wind businesses have struggled. BP agreed to buy Lightsource in November, a utility-scale solar and battery storage company where it already had an equity stake. BP has one of the more ambitious low-carbon agendas among oil majors, with plans to invest in 50 gigawatts of renewable energy projects by 2030. However, the company has been pulling back on some low-carbon investments, such as plans for a major offshore wind farm near New York.
Streetwise:
-Artificial-intelligence companies are leading the way in mentioning "edge" in their earnings calls, with chip maker Advanced Micro Devices and memory maker Western Digital highlighting the growth opportunity of AI at the edge. Qualcomm and Procter & Gamble have also made significant mentions of edge computing, with Amazon Web Services defining it as "the process of bringing information storage and computing abilities closer to the devices that produce that information and the users who consume it." This trend is similar to the early 1990s, when personal computers were obsolete and processing power primarily lived on user machines, with each new version of the Microsoft Windows operating system requiring more of it.