Dr. Li Ning believes that the third quarter is a period of uncertainty. While there is still a lot of controversy in technical analysis, it is certain that the long positions will eventually prevail. The worst scenario is an unstable bottom which will present great opportunities for long positions amid the coming bull market in the fourth quarter and next year.

The US Core Consumer Price Index (excluding energy and food) has fallen for 3 consecutive months. While the price of natural gas (the main energy source for domestic power generation) in the United States has fallen by more than 40% from its peak in just one month, and the price of wheat, a staple food, has also fallen rapidly to the level before the Russo-Ukrainian war. As the global supply chain begins to recover in the late stage of the epidemic and people return to the labor market, the inflation induced by the supply chain and the wage growth by labor shortage will also slow down. Dr. Li Ning remarked, “Retailers are heavily discounting to dump excess inventory, and upstream commodity prices such as copper, aluminum and steel are reaching a 1.5-year low. Based on the logic of inflation and increase in interest rate, the market hype is not enough to support further drop in the US stock market and bond market.”

In fact, natural gas is the main energy source for industrial electricity, air conditioning in summer and heating in winter in the United States. Thanks to the shale gas revolution, the production cost of natural gas is just about US$2. Most of the natural gas is consumed domestically because the volume to be converted into LNG for export is constrained by production capacity. Energy inflation in the United States is more affected by natural gas prices than oil prices. The price of wheat, a staple food in Europe and the United States, has quickly fallen below the price before the outbreak of the Russo-Ukrainian war. Although the Russo-Ukrainian war has not yet ended, it is no longer justifiable to base the trading strategy on the fact that Federal Reserve sharply raised interest rate by 75 basis points to counteract the hyperinflation of food prices that is inducing worldwide panic. Wheat price has fallen almost 40% from its March high of 1363. Dr. Li Ning added, “In addition, the price of aluminum, an important upstream material for automobiles, aircraft and building materials, has fallen for 16 consecutive months. The severity of the drop is beyond the explanation of energy costs and currency increments. With the true recovery of global infrastructure building in the future, I believe it can be the start of a bull market.

Dr. Li Ning also pointed out, “To determine whether the stocks are cheap or not, we need to consider the economic outlook, where we come to evaluate the popular assertion that economic depression is ahead. Judging from the health of the U.S. national financial system, household income growth, employment, overall economy, future economic growth potential and recovery expectations, the assertion of economic depression in the United States is highly unlikely to materialize.” When it comes to the real economic situation in the United States, he drew similarities between the past six months and the good old days of “war profiteering” during World War II — the dollar index at an all time high, large influx of funds, and severalfold increase (since last year) in profit from energy, food and high-tech products which accounted for the largest shares in exports. In fact, the long-term economic potential of the United States is completely intact. If taking into consideration epidemic control, employment and changes in household income, consumer spending in the future will be stronger than in most countries, including China. All factors considered, Victory Securities concluded that the current valuation of U.S. stocks is low; interest rate has peaked; and the possibility of economy depression is very low.

Dr. Li Ning believes, “In the third quarter, the U.S. stock investment strategy is to open positions and hold onto shares. Because the market is still in the late stage of the interest rate hike cycle; liquidity is still lacking; and the market needs time to recover, I expect there will be no sharp increase. However, as mentioned above, the decline in the U.S. stock market is about to come to an end and we are expecting a bull market. It is not recommended to perform shorting or reduce holdings of existing stocks at current price. Instead, you can increase your position in moderation and hold onto shares. He expects that when the interest rate hike cycle is over, the growth factors will make a comeback.

For more information about the investment opportunities in global stock markets, please visit Victory Securities’ website at www.victorysec.com.hk.

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