Two more pressing questions keeping investors up at night

Whither China’s economy, the Magnificent 7?

As I discussed in my previous article, global pessimism, as it has been in recent years, remains elevated. Investors have taken notice of the chaotic conditions, with our inbox overflowing with questions over the last month. Last time I discussed three of the five most pressing questions we encounter. With this article, I answer two more pressing questions, about China and the Magnificent 7 big-tech stocks, aiming to help macro-minded investors make sense of the unfolding landscape and stay on track with their longer-term objectives.

Question 4: China’s economy

Is the recent stimulus out of China a game changer for the country?

The world recently gave up on China. After enduring a three-year-long property bust and post-pandemic slump, many concluded that China’s economy was beyond repair, beset by geopolitical tensions, heavy-handed regulations and a looming Japanese-style deflationary spiral. This narrative led to global investors drastically underweighting Chinese equities and the closing of China-focused funds. The term “un-investable” has become synonymous with China. With local stock markets getting clobbered, most investors felt like they were on the right side of history.

Until recently, it was hard to challenge this view. But change is afoot. China has recently rolled out a series of turnaround measures, including interest rate cuts, relaxed reserve requirements for banks, stock market support, and promises of fiscal stimulus. Are these fiscal measures super detailed? No. Will a sliver of a percentage point off interest rates turn the long-suffering property sector around? Not immediately. Will the Chinese government continue to prioritize market share and industrial self-sufficiency over profits? Almost certainly.

But the key point is that Beijing has broken free of its policy paralysis. Authorities are now squarely focused on resetting expectations. Unlike Japan, there’s no structural reason for Chinese households and companies to stay in defensive mode indefinitely. Investors who fixate on the specifics of the stimulus are missing the larger point: The main issue is whether China is serious about short-circuiting the negativity and boosting confidence. We believe they are.

As sentiment and positioning normalize, the quality of the interventions will matter more – but for now, the priority is to take left-tail risks off the table. Looking ahead, China’s stimulus will broaden the global cyclical recovery, extending it beyond a US-centric rebound. A range of emerging market equities, including cyclically-oriented equity sectors and commodity-exporting nations, are nowhere close to pricing any of this in. Forstrong Emerging Market Equity ETF (TSX: FEME) is positioned to capture this new uptrend.

Question 5: The Magnificent 7

The Magnificent 7 have had a stellar run but are now facing more volatility. What’s happening?

Since 2010, the S&P 500 has delivered nearly 600% in total returns, driven largely by robust U.S. earnings and the outperformance of tech stocks. These top tech companies, responsible for nearly half of the S&P 500’s returns since 2010, are now trading at 30 times their expected earnings for the next year, fueled by excitement over artificial intelligence (AI). Most asset allocators are now fully mesmerized by mega-cap American tech companies and firmly committed to a structural overweight.

This is risky territory. High expectations make disappointments more likely, as seen when Nvidia shed a third of its value over six weeks on disappointing earnings. The key risk here relates to AI itself. Demand for AI chips could fall short of forecasts, making it harder for tech companies to justify their massive investments. Alternatively, non-tech companies might see a boost as AI improves their productivity, leading to a rise in their valuations. Historically, markets tend to overestimate returns for innovators and underestimate returns for users.

Today, global markets are concentrated in a single theme – AI and Big Tech. However, as the global business cycle accelerates, there’s an enormous opportunity for a shift away from these defensive growth stocks, which do better when growth is scarce and policy is restrictive. The start of Fed rate cuts and broadening profit growth globally will shift momentum toward small caps, value sectors, and cyclical segments of the market. With these assets trading at steep discounts, the potential upside is significant. At a minimum, it’s time for some rebalancing.

Tyler Mordy, CFA, is CEO and CIO of Forstrong Global Asset Management Inc., engaged in top-down strategy, investment policy, and securities selection. This article first appeared in Forstrong’s Insights page. Used with permission. You can reach Tyler by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at tmordy@forstrong.com. Follow Tyler on X at @TylerMordy and @ForstrongGlobal.

Disclaimers

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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