Kim Bolton, president and portfolio manager, Black Swan Dexteritas

FOCUS: Technology stocks 

MARKET OUTLOOK:

The Black Swan Dexteritas [BSD] Global Tech Hedge Fund investment is down 10 per cent for calendar 2022, which is significantly better than the broad market equity indices. Halfway through the first calendar month of 2023, the BSD Fund has gained 3.5 per cent. By every measure, 2022 was a terrible year for tech growth shares. Soaring interest rates, component shortages, high inflation, a war in Europe and the strong U.S. dollar combined to deflate multiples for consumer tech and enterprise tech alike.

The initial-public-offering market froze, the Nasdaq Composite fell more than 35 per cent, many tech stocks were down more than 50 per cent and just a lucky few finished the year in the green. It was the worst year for tech shares since the 2008-09 financial crisis.

Despite the huge 2022 tech selloff, there is a risk of lower lows as the U.S. Federal Reserve continues to boost interest rates to fight inflation. Meanwhile, the Street fears that 2023 earnings estimates are too high and that a recession is almost certainly going to hurt the outlook for almost every company.

The big questions for tech are about macro trends, once the market thinks the Fed’s rate hike cycle is nearing completion, tech stocks will lead the market rally. Your BSD portfolio management team believes the world's central banks will gather enough data about slowing inflation by the spring or early summer of this year, so as to pause their rate increases. This will encourage investors to employ their cash reserves. Remember, the stock markets are a barometer of the economy six to nine months in advance. With this logic in mind, now is the time to be constructive on the stock market's leadership sector, the technology arena.

Up until recently, your Black Swan Dexteritas team was very defensive, via an overweight short equity index overlay on our portfolios. Currently your BSD team believes the stock market has the fundamental, technical and capital flow tailwinds to rally sometime soon.

Earnings season is underway and could be the defining factor between whether bear market downtrends prevail or a new bull trend has been established. We also appreciate that fighting the Fed and the bear market momentum is a battle that is not worth fighting. We will keep a defensive position until a positive risk-on sentiment takes hold; we have learned to be agile and listen to the market’s momentum. We are confident our portfolio and risk management tools will continue our nine-year track record of 11+ per cent annualized returns for the BSD Global Tech Hedge Fund. Your BSD team has a proven track record to both protect your capital in bearish markets, and grow your capital in bullish markets.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

BYD Company (BYDDY OTC)

• BYD Co. is a Chinese technology conglomerate. It is involved in a variety of markets including automobiles, electronics and renewable energy.
• BYD is one of the largest new energy vehicle (NEV) and power battery makers globally with 32 per cent NEV and 26 per cent power battery market shares in China as of the third quarter 2022.
• Its major subsidiaries are BYD Automobile and BYD Electronic.
• BYD Automobile is the world’s largest producer of Li-Ion batteries for EVs by production capacity.
• BYD Automobile has strategic partnerships in place with global automotive leaders such as Toyota and Daimler, with whom it is separately developing BEVs (battery electric vehicles).
• BYD Automobile also produces EVs (cars, SUV’s) and commercial EVs (busses, forklifts etc).
• BYD will launch a new "professional and personal" electric car brand in 2023, a senior executive said, as the automaker expands its range following a year of strong sales.
  • Brian Luo, the company's branding assistant general manager, made the comments at a media event. The new brand will be an addition to Yangwang, a premium brand set for launch in the first quarter of 2023 that it announced last month.
  • It has been making a wider global push, selling its pure electric to markets including Norway, New Zealand, Singapore, Brazil, Costa Rica and Colombia.
  • Luo said BYD has sold cars to 35 countries outside China since it started exporting to Norway last May.
• We think three key factors will move the company forward:

1. BYD seeks leadership in both auto-making and battery-making and we expect it to gain share in a large and growing China TAM.
2. Pricing premiumization: We expect pricing growth to accelerate as the company focuses its product line on high ASP models.
3. Battery capacity ramps and potential to sell externally. OEM customers have been reportedly exploring partnerships with BYD per GGII, including ChangAn-Ford, Dongfeng Voyah, Toyota, Tesla and FAW Group. 

Alibaba Group Holding (BABA NYSE)

• Operates in four segments including core commerce, cloud computing, digital media and entertainment as well as innovation initiatives.
• Cross-selling capability remains a key competitive advantage.
• Alibaba has been transforming its business from an online distribution platform to a technology enabler for online merchants via effective use of AI and big data. Driven by the ongoing development of various value-added solutions, Alibaba’s revenue mix has been improving with revenue contribution from emerging businesses, such as consumer services and cloud computing, has been rising.
• Beijing prepares to loosen its grip on the sector and move past a bruising crackdown that’s enveloped most every internet sphere for well over a year.
  • Signs are growing that Xi Jinping’s administration, keen to revive the world’s number two economy, is reversing course on campaigns against gaming addiction and preparing to unfetter firms such as Alibaba that drew government scrutiny.
  • The country’s central bank is exploring ways to help the technology industry. The People’s Bank of China will study financial support measures for the healthy development of tech companies, Ma Jianyang, an official with the PBOC, told a news briefing in Beijing last Friday without elaborating.
• We see further earnings upside and expect more room to go for China’s internet sector performance on China's faster-than-expected reopening, macro recovery from the second quarter and normalizing internet regulations.
• We see four reasons underpinning Alibaba's share price performance in 2023:

1. Back to positive double-digit advertising plus commission growth, with the recovery of apparel and cosmetics categories and recovery in growth at local services.
2. Plateauing of competing live-streaming shopping format in a reopening year.
3. Next growth drivers across AliCloud and International (Lazada), entering into easy bases.
4. Attractive valuation at 9X ex. cash P/E vs. sector average of 16X, pricing in an ex-growth core and not valuing its cash/ex-e-commerce businesses, with the company's already announced aim for dual-primary listing in HK for Southbound eligibility.

Taiwan Semiconductor (TSM NYSE)

• TSMC is the undisputed market leader of semiconductor foundries, with 50.5 per cent market share.
• TSMC maintains it leadership in the foundry market with advanced process technologies and huge economies of scale that competitors can’t come close to matching.
• TSMC focuses solely on manufacturing customers’ products and ensures that it never competes directly with its customers by choosing not to design, manufacture or market any semiconductor products under its own name.
• Its position is solidified by its continued capital investment. It announced $100 billion in 2021-2023 capital expenditures.
• During its second quarter 2022 analyst meeting in mid-July, TSMC acknowledged it expects to see an inventory correction cycle into the first half of 2023.
• TSMC is guiding high single digits of semi-compound market revenue growth in the next five years for the semi (ex-memory) industry, with dollar content growth to be mid to high single digits.
• TSMC commented in its last analyst meeting that the inventory correction cycle is expected to last into the first half of 2023.
• TSMC holds three overseas expansion projects in Japan, mainland China and the U.S. as of now.
• Current dividend yield of about two per cent.
• TSMC executives addressed concerns about a prolonged chip crisis at its earnings announcement last week, forecasting a small annual revenue growth and the beginnings of a recovery in the latter half of the year. Markets had been bracing for a far weaker outlook.
• Executives reiterated the company’s plans to ramp up next-generation two-nanometer chips to meet demand for more powerful and energy-efficient silicon. The company began bulk production of advanced three-nanometer chips last month.
• Steady migration to next-generation process nodes, such as N3 in 2023, N2 in 2025, new specialty manufacturing capacity and 3D-packaging technology, ensure the company’s long-term domination of the contract chip-making market and could help its long-term gross margin stay in the 53-60 per cent range, far above peers.
• TSMC has potential over the medium term, but this is a stock for long-term investors that are willing to wait for the value to be unlocked over a time frame of three to four years.