What is “Smart Money”? By definition, it refers to sophisticated investors who have a comprehensive observation and understanding of the financial markets, those who often spot and foresee trends before others could, those who act with timely execution and high sensitivity to market capital flows.
On Wall Street, smart money can also mean the big capital firms that can move markets, namely Goldman Sachs and J.P. Morgan. These well-established Wall Street giants produce reports which gauge the price movements of stocks.
Among the Wall Street crowd, hedge fund managers are supposed to be the smartest. George Soros, Carl Icahn … you might know some of the other names. There are also the highly accomplished corporate investors, such as Warren Buffett and Hong Kong billionaire Li Ka-shing.
If you are a frequent reader of this column, you will be aware of my bullish outlook on the China and Hong Kong stock markets. A slow market bull run would be indispensable for the development of China’s capital market, enhancing its financing function and supporting its deleveraging efforts.
Yet, few people agree with my “bold” forecasts. I recently met with bankers, security traders, and professional investors in Shanghai, and I noticed that their buying interest in Hong Kong and foreign stock markets are rising.
However, they remain skeptical and unfamiliar with markets outside mainland China. And they would not forgo property investment that they are well acquainted with, as well as wealth management products disguised as “risk-free” insurance products.
Similarly, in Hong Kong, the majority of investors are totally addicted to real estate speculation. But what they don’t notice is that even if Hong Kong’s property bubble is a long way from bursting, investment in the sector is likely to offer a disappointing return.
Hong Kong’s home price benchmark, the Centaline’s Centa-City Leading Index, has so far risen 11 percent this year, much slower than the 25 percent increase in the Hang Seng Index. The same thing can be said about New York: US stock indexes continue to hit record highs, while home price in the city has declined 6 percent year-to-date.
Recently, I was in a meeting with a few big-name analysts at J.P. Morgan in New York. One of them said that based on experience, he predicts inflation will escalate and the Fed will tighten with rate hikes, triggering a recession lasting two to three quarters. The stock market bull run will then come to an end.
I disagree. I believe deflation, rather than inflation, will be a bigger concern for world economies. Interestingly enough, I later met with J.P. Morgan’s chief economist, and she sounded much more bullish on US economic growth, saying that she couldn’t see any sign of recession. In fact, she expects the growth cycle to last five more years.
What I shared in the meeting is my view that “data is the new oil” and South Korea will have a more decisive position among world economies than Saudi Arabia, the biggest crude oil supplier, as the former now corners 80 percent of the DRAM chip market and supplies nearly half of the NAND chip demand worldwide.
After that, I had a meeting with a semiconductor analyst at J.P Morgan, with whom I shared my view of a “super cycle” in the semiconductor industry, which was triggered by a huge surge in demand for memory chips used for processors in servers.
In my opinion, with Moore’s Law in improvements in price/performance slowing pace, the competition in the industry will erode over time and an oligopoly will emerge.
Previously, players in the semiconductor market poured investments into market share gains, rather than focusing on profits. But now, Samsung Electronics is observed to be reducing its capital expenditures on DRAM. Although Samsung is spending heavily on 3D NAND, the transition from 2D NAND to 3D NAND chip is awfully difficult, expensive and time-consuming (it takes around nine months).
Even though Samsung, the industry leader, keeps advancing its technology, the defect-free rate of its cutting edge 64-layer NAND has fallen to around 50 percent, which is unsatisfactory for making a profit on this new product. Other players in the market such as Western Digital and Toshiba are likely to face a similar predicament with 3D NAND technology.
You should take note that a recent piece in The Wall Street Journal describes the global supply crunch of NAND memory chips as “sort of like OPEC [controlling oil supply]”. That’s the first time people compared NAND chips with the oil market.
As told by the semiconductor analyst at J.P Morgan, Google is now paying a significant 40 percent premium to secure NAND chip supply from vendors.
During the meeting, I was asked for my forecast on the average selling price (ASP) of DRAM and NAND chips next year. I said there is a small possibility of a significant drop (about 10 percent) in the price of DRAM chip since no supplier is substantially expanding production capacity.
NAND chip has a larger growth in demand than DRAM, but Samsung and SK Hynix probably won’t start implementing expansion plans before the second half of 2018.
Samsung and SK Hynix continue to reach record highs this year. However, the PE ratio of both stocks is shrinking. Market participants are expecting a correction in Samsung’s stock price (one of the possible triggers can be the poor sales of iPhone X).
In that case, if the company goes full throttle with its production, neglecting ASP and operating margins, a deeper correction of its stock price is likely.
But if Samsung slashes its production, resulting in supply cuts from the world’s major producers, the profit margin of the industry will be boosted. When the struggling Micron Technology starts making a profit, a revaluation boost to the industry’s PE ratio is likely to happen.
This article appeared in the Hong Kong Economic Journal on Sept. 26
Translation by Ben Ng
[Chinese version 中文版]
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