Global Hedge Funds Give Conservative September Outlook

Global hedge funds are issuing a conservative outlook for the September market and adjusting their portfolios to neutral. Song Jae-kyung, CEO, mentioned that September is a traditional seasonal weak period, and there is a possibility of a turning point in the market after the Jackson Hole meeting. This analysis is based on past statistics, and as August draws to a close, vigilance about the market in the second half of the year is increasing.

Although there are statistics that September is traditionally a weak period for the stock market, a clear causal relationship for this has not yet been identified. Song Jae-kyung, CEO, emphasized that this is an empirical fact based on past data, stating, "It's not clear what the cause is; seasonality itself means we don't know why, but it has always been like that statistically in the past. It's always been like that." Various factors such as decreased trading volume and midterm elections are suggested as possibly playing a complex role.

Despite NVIDIA's strong earnings, the market warned against over-interpreting them. Song Jae-kyung, CEO, emphasized, "We should not over-interpret the enormous rise in NVIDIA's stock yesterday after its strong earnings, nor the huge rise in the software sector." This rally is largely due to hedge fund short covering and cannot rule out the possibility of being a one-time event, according to analysis.

The background to NVIDIA's 70% revenue growth guidance was a supply chain capacity (Capa) issue. Song Jae-kyung, CEO, interpreted that NVIDIA presented a modest target, considering the prediction that hyperscaler investments will reach 1.3 trillion dollars next year, stating, "It was like CF (CEO Jensen Huang) was saying, 'We're only talking about 70%.' He said next year will be 1.3 trillion dollars. Because of that, we could have actually grown by 100%." The interpretation is that actual growth of over 100% might have been possible.

Song Jae-kyung, CEO, advised to welcome NVIDIA's amazing performance and future prospects, but to approach the conditions for their maintenance cautiously. He stated, "While we cheer for NVIDIA's amazing performance and future prospects overnight, we need to consider that these can only be maintained if certain preconditions are met, rather than over-interpreting them." Investors are currently maintaining a neutral stance due to uncertainty about interest rate volatility.

Behind NVIDIA's revenue growth in the past three quarters was a sharp increase in purchase commitments and payment guarantees. Song Jae-kyung, CEO, explained, "Looking at the last three quarters, behind this tremendous revenue growth is a huge surge in purchase commitments and payment guarantees, which is the yellow line." This change in revenue growth method could pose a potential risk in the future, requiring continuous observation, according to analysis.

The rapid increase in funding rates for AI data center construction is adding to companies' financial burden. Song Jae-kyung, CEO, mentioned, "Just four months ago, when companies borrowed funds from the market to build AI data centers by issuing bonds, the funding rate was 5.7%, but in four months, it surged by 150 basis points to 7.2%." This increase in interest rates acts as a pressure factor, directly lowering companies' target returns and increasing their financing costs.

The bond yield premiums for major big tech companies have also risen. For 30-year bonds, Google demands about 6.5% and Meta about 7%. Song Jae-kyung, CEO, explained, "For 30-year bonds, Google demands about 6.5%, and Meta demands about 7%," analyzing this as a high premium compared to Treasury yields, reflecting market concerns.

In August, when there is no FOMC meeting, the Jackson Hole meeting is expected to serve as a major turning point for the market. Song Jae-kyung, CEO, stated, "2022 was a significant turning point. Powell gave a 9-minute speech that surprised everyone, with very hawkish remarks that caused stock prices to fall by 15% in five weeks, interest rates to surge, and the dollar index to strengthen." He revisited the example of the market crash in 2022 due to Chairman Powell's hawkish remarks. Important signals regarding the Fed's monetary policy direction are expected from this meeting as well.

Amid deepening concerns about market interest rates, an opinion emerged that it is difficult to predict how Wall Street will react. Song Jae-kyung, CEO, emphasized, "We have seen how it will react over the past month. Everyone has shown their cards, so if anyone claims to know what Wall Street will do, it's a lie. 'I don't know' is the answer." He stressed that short-term predictions are difficult and 'I don't know' is the honest answer.

Central banks globally are generally maintaining an upward trend in policy rates, which is expected to slow down the economy with a time lag. Song Jae-kyung, CEO, forecasted, "Globally, central banks' policy rates are on an upward trend. This will, with a time lag, serve to slow down the economy. As we head into next year, there will be a global trend to slightly cool down the economy." As the economy improves, the gap between market rates and policy rates will narrow, and next year, a cooling trend in the economy is expected, along with a potential downward trend in indicators such as manufacturing PMI.

Analysis suggests that if Japan wants a stronger yen, an interest rate hike is inevitable. Song Jae-kyung, CEO, commented, "If Japan truly wants a stronger yen, it must raise interest rates. In the current situation, they probably have to raise them because the US also wants that. So, it should naturally proceed this way." The US also desires Japan to raise interest rates, so a policy change by the Bank of Japan is anticipated.

In a high-interest rate cycle, growth stock promises become hollow, and value stocks and dividend stocks emerge as attractive, according to analysis. Song Jae-kyung, CEO, said, "In a high-interest rate cycle, value stocks are always visible. Interest rates have risen to a level where bond investments can be considered even accounting for inflation, creating competition. You should also pay attention to dividend stocks." Current interest rate levels make bond investment considerable even with inflation, and dividend stocks also compete with bonds due to attractive yields. During a strong won, essential consumer goods companies with high import ratios could benefit.

Concerns about the US fiscal deficit are growing, and the impending debt ceiling risk at the end of the year could become a major market variable, a warning stated. Song Jae-kyung, CEO, said, "Concerns about US finances have grown significantly, and it seems the debt ceiling will approach by year-end. If there's another debt ceiling crisis and a government shutdown for several months, it will be a big problem. A technical default could occur." A government shutdown due to the debt ceiling issue could lead to a technical default, which would make a dramatic strengthening of the dollar difficult.