Investor Webinar 23 August 2023: Big trouble in China, NVIDIA is reporting this week and a shout out to 4DS Memory

 

In this week’s Investor Webinar:

Big trouble in China, NVIDIA is reporting this week and a shout out to 4DS Memory!

 

There are 2 potentially big impact items on the agende this week:

• NVIDIA‘s Q2 results tonight, and
• Jerome Powell’s speech at Jackson Hole on Friday

Also in this week’s Investor Webinar:

• Big trouble in China! Is it collapsing?
• 4DS Memory has sorted it’s technical issues and can move forward now!

Full transcription below.

 

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Transcription

 

Marc: Good morning. It’s the 23rd of August, 2023, and the time for our weekly webinar. Morning, Stuart.

Stuart: Morning, my esteemed colleague. What’s happening?

Marc: Well, there’s a lot of new slow today, a lot of earnings coming out, including for some of our Concierge picks, and they turned out pretty positively. So any subscriber to Concierge, we’ll see the updates on that in their inbox and on SMS. Other than that, we’ve got a lot to look forward to tonight, NVIDIA’s reporting, and later this week on Friday, to be precise, Jerome Powell, the Fed Chairman, is speaking in Jackson Hole. The Kansas City Fed is hosting their symposium and usually, the Fed chairman speaks there as well. And so the market is looking to see what’s, what’s coming outta that. So we’ve got that.

And after that too, you’ll talk about China, what’s happening there, because that’s also a big factor in driving the market in the past couple of weeks. But let’s start off with the key agenda items for the rest of this week. So, like I said, there are potentially very high-impact event, right? Let’s start with NVIDIA. They will be releasing their Q2 results tonight. So, their quarter just ended July in, you know, not like most companies like June. So this one is July. And if we look at consensus estimates, the market is looking for 11.1 billion US dollars in revenues for Q2, earnings per share of $2.09.

So that in itself is important, obviously. Is it going to be better or worse than that, or maybe in line. That’s an important metrics, obviously. But what drove the market last time, and you can see it on the chart there, all the way on the right, you see that big breakaway gap in the chart that was caused by NVIDIA saying that the outlook for the quarter just ended was about 50% higher than the market was expecting.

So the outlook for the quarter that we’re in now, the Q3 that just started in August, that’s 12.4 billion. And that estimate is by about 35 analysts. So it’s an average of their expectations. If it’s better than that, we might see another jump in NVIDIA. If it’s below that that’s, that’s really what will push the market down a bit further, because as you can see also on that chart, we’ve been moving sideways for a month or so, and some semiconductor stocks have been coming down, actually. So we think tonight is going to be a real important one for this space, for semiconductor specifically, but also for the broader tech market, because we saw a boost in stocks like Google and Apple as well when NVIDIA released that outlook a little while ago. Yeah, so, basically messages, you may wanna stay up tonight to see what you’re actually reporting because it’s a big one in my view.

All right, then moving to what the Fed and what JP will be saying on Friday. So we can call him JP, right, sir? We’re pretty close with him. So he’s speaking there. The market is really waiting to see what is coming outta that speech. Some people are saying, well, he won’t be saying anything interesting because it’s just too delicate at the moment. And the reason for that is inflation’s been coming down, but any sort of dovish comments coming out of that speech will be considered very bullish for the share market, right? So that will drive the market up.

Too hawkish and the market will take another hit, and we’ve already seen some weakness in certain sectors. So it’s a fine line that he needs to walk. So he’ll say, look, we see that this progress being made on inflation that’s coming down in the U.S. on different fronts, but he’ll probably leave the door open for, well, a long period of current interest rates, you know, a hold basically, no cutting in early next year, or even another slight increase if the situation warrants that.

So, it’s a very tricky one, I’m glad I’m not in his shoes, but still, the mark will be watching this, and we’ll see what comes outta that. So I think those two events this week are what will be driving the market. On top of that, Stuart, one thing, it’s not much an event, it’s a development, right? What’s happening in China has really depressed the market of late. So talk us through what’s going on there and what we should be expecting.

Stuart: And, Marc, you and I have known each other for a few years now. Do I generally lean towards the bullish side of a story or the bearish one?

Marc: Usually bullish, I assume

Stuart: Right. Today, I’m being bearish. So the folks who are watching the video ought sit up and take notice because it’s unusual for me to be like this. Let’s talk about China and why you should stay alert. Now, China is the world’s second-largest economy. So the reason why everyone pays attention to China every day of the week is because when China sneezes, the world is in danger of catching a cold.

Now that you can see is what’s happening. Since about April, things have been getting a little bit dangerous in China. They came out of the zero COVID lockdown in January, and it had a short growth spurt in the early months of the year, and then everything started to slow down again. Let’s talk about what’s going on in China. So back in the day, China used to grow 8% to 10% a year in their economy without trying too hard. Now, economic growth is stalling, and you ask around the forecast as they’re going for less than 5% this year, which is terrible. Just about every indicator that you care to name is going down, consumer prices going down, exports going down.

Interestingly, youth unemployment is now so bad the government stopped publishing the data. So it’s like 20% or 30% or more, but there’s a heck of a lot of young people who just can’t find jobs in this formerly highly productive economy. And it’s all because of a real estate crisis that’s been going on for about three years now that it hasn’t crashed all at once, but it’s just been progressively getting worse. So let’s talk about that.

So a lot of the foundation of China’s boom going back 20 years has been building real estate. You’ve had people moving outta the countryside, moving into the cities. Homeownership is highly prized amongst Chinese people. So a whole bunch of developers have tapped into that. And indirectly, Australia is one of the beneficiaries because those buildings need a lot of steel. You need iron in order to make steel, and we ship a heck a lot of iron ore, for example.

So when the the real estate boom unwind itself, everyone in the world in some way is in trouble. Now, it all started in 2020. The government moved to curve excess borrowing because they thought that house prices were rising too high. That put the clips on the developers. The first to get in trouble was EverGrant and we first heard rumors of that company defaulting on its debt in 2021. It’s now filed for bankruptcy as of this month. Next one to fall is Country Garden. These are all huge companies with countless billions of dollars in debt. And there are others. So the majority of the country’s developers now are in financial difficulties.

The knock-on effect now is it’s beginning to affect what they call the shadow banking sector. So not official banks, but countries, but in entities that do lending, and obviously, the banking system is in trouble as well. So until this crisis gets fixed, China is going to be in the news for all the wrong reasons. So let’s just think about what could happen here. Now, remember, it’s not what will happen, but what could happen since we’ve seen the story play out in other economies and at other times.

So China’s growth continues to slow. At some point, the banking system freezes up potentially. You get a panic. Stocks go to levels last seen during the global financial crisis of 2009. You then see the rest of the world start to worry and the term for that is contagion. And we end up with a situation not unlike the 1997 Asian financial crisis. And as I’m watching the situation, it feels eerily familiar to that event. So that’s the bear case. I think it’s gonna get worse before it gets better, but I have included a slide just for the point of difference.

It might not be as bad as the Asian crisis. Remember, this is China, so they do a bit of capitalism in China, but the state-owned banks and the state enterprises are also pretty important. So the central government could just go and bail everyone out, find some way to correct the real estate market. The world goes back to normal in terms of avoiding…of China not being things to worry about and we get to enjoy more fun stuff, like whether the earnings of NVIDIA are going up because of a new semiconductor plant they’re building in New York. So that’s the bull case. I’m leaning towards the bear case at the moment, Marc, but you and I were talking about this yesterday. The point is the Chinese government gives themselves more leverage over the system than their counterparts in the Western world, and that could make the difference here.

Marc: That’s what I think. Yeah. So China’s not a normal country in that sense. The influence of the government and the way they can steer the economy to some extent with direct sort of, you know, direct measures is a bit different from what we’re used to in Western countries.

Stuart: Right. So, yeah, I’m afraid it’s gonna get a little out of hand. A book I’d recommend to the readers, which I’m reading at the moment, “The Coming Collapse of China” by Gordon Chang, picked this up recently, and it’s a page-turner. The book was written some years ago, but it could describe events that are going on right now and it doesn’t paint a pretty picture of what’s gonna happen.

Marc: What’s the gist of that other than China collapsing, but what’s triggering it in that?

Stuart: So, the gist of it is gradually the Chinese government loses control over the people. So you’ve been seeing, for instance, through the COVID lockdowns and in this real estate crisis, the complaints about people not being able to collect the apartment they pay for turning into anti-government demonstrators. Now, China has a way of cracking down on those things in a serious way. But as this real estate crisis becomes more severe, it could turn into a political crisis.

We saw that, for example, in Indonesia in ’98. So it’s not unreasonable that could play itself out, in which case markets will be under a lot of pressure in the near future. Now, lest you attempted to open up the window of your apartment and jump, I want to add, Marc, you think back to the European experience during the Asian crisis, life went on pretty much as normal in the Netherlands, and the markets were okay through that period. You were barely touched by the Asian crisis, right?

Marc: Well, look, there was a spillover effect, but it was really short-lived, right? You saw, and so I remember a few instances in sort of the late 90s where when the Asian… Well, emerging markets really were impacted, including Asia, but that corrected itself pretty quickly. But China’s a different order of magnitude, right?

Stuart: China is a bit bigger. But the point is take it down here. The Aussie dollar came down to about 50 cents U.S. I believe our currency will be under pressure in the near term and could indeed go as low as that level. But the economy continued to grow. All the economic indicators allowed us to pass through the Asian crisis virtually unscathed and that was with a big slub of our exports at stake from…

Marc: I can hear Chinese secret police in the background there, Stuart, coming to pick you up.

Stuart: If they come and hold me in at any moment, yeah, you’ll find me in some Gulag at Xinjiang or someplace like that. All right. But what have you gotta watch out for? The iron ore miners are heavily leveraged to this theme, so I’d be very careful of the likes of FMG and mineral resources and so forth. The same deal with the lithium players because China’s set itself up as the powerhouse of lithium-ion battery production. That’s obviously changing. As the EV revolution takes hold, lithium is being processed closer to the Western world markets. So it’s less of an issue, but at the present time, it’s still an issue. So I’d watch out for the lithium miners, and I’m expecting some weaknesses in the lithium price.

Marc, you and I were talking about particular lithium stock that our Stocks Down Under subscribers made good money in. And that was over a brief period in the middle of this year. I suspect the timing was exquisite there because the lithium miners are now under pressure. A2 Milk I think that’ll be under pressure. And we saw the stock knocked down heavily after the result just got announced because they’ve leveraged a lot of that growth to Chinese consumption of A2 milk.

Treasury Wine Estates was hoping to get back a lot of their lost market when they rent us into some tariff problems with Australia a few years ago. Their return to China is probably gonna be put on hold in the next little while, at least in a serious way. So I think they’ll be impacted. There’s a little company called AuMake, ASX: AUK, that does the debut trade where Chinese visitors come in and out of Australia buying stuff to take home again, that will probably be impacted. It’s fair to say that anyone leveraged to Chinese tourism, they’re not gonna see their come back anytime soon.

I don’t see anywhere near as many Chinese tourists on the streets of Sydney as pre-COVID. So those tourists have yet to come back then, in that sense, probably, I suspect the airlines might be slightly impacted because there’ll be less activity coming in and outta China. So you gotta watch the stocks that are leveraged in that way.

Once you move outside sectors that are not leveraged in China, the situation becomes much rosier. If you think back to the Asian crisis, that was the beginning of the mother of all tech bursts, and that kind of bubbled away regardless of what was going on in Asia at the time. So the kind of calls we’re talking about like NVIDIA could continue to do quite well in this environment.

Marc: All right. Good stuff. Can you hold that book up for the camera?

Stuart: “The Coming Collapse of China” by Gordon Chang. I heard Gordon Chang give a speech over the weekend, and for the first time in a long while, I felt scared. So don’t read this last thing at night. You might not have a good night’s sleep.

Marc: All right. Well, the market just opened, and just a quick update on 4DS Memory. So we followed that stock for a long time, and we wrote about it a little article on Stocks Down Under last week, I think, and this morning they announced that after a lot of rejigging of the product and the manufacturing and the testing of it, they finally found the issues. Well, they found the issues, but now they came back with the additional testing of the new wafers they manufactured, and the problem seemed to be solved.

There’s still a lot of work to be done going forward, because there’s further scaling down of the product to be done and a lot of stuff needs to happen in the next little while, but at least they’ve fixed that problem that they had, which is very good. And on the back of that news, the share price doubled just this morning. So that’s good news for a 4DS Memory. And as people will know, we follow the semiconductor space quite closely, and it was just a pity that they had, essentially it was mostly manufacturing issues that led to these problems, right? So it’s good to see that these companies are getting on top of these problems. And it’s, hopefully, up and away from here.

Stuart: Yeah, Well done to Dave McAulife and his colleagues for the professional way they’ve handled this issue.

Marc: And we’ll leave it here. We’ve gone for about 15 minutes. I think there’s a lot of stuff to watch this week. Send us your questions as always on [email protected], and we’ll try to answer ’em in this webinar. Stuart, thank you very much.

Stuart: See you soon.