Inflation and interest rate hikes and doubts about the realization of AI, wait for bargain hunting after the float is cleared

The current tone of the global economy is still centered on the spiral of inflation and interest rates. The U.S. FOMC in October voted 10 to 2 to maintain the federal funds rate at 3.75% to 4.00%. Cook and Hammack advocated a 1-point increase in interest rates, indicating that there are still internal tightening voices. However, the statement changed the economic description from "stable" to "strong" and emphasized that more information is still needed to determine the direction of subsequent policies. The overall tone is gentler than before. However, the annual PCE growth rate rose to 3.6% in September, and the core PCE rose to 3.1%. High oil prices, sticky service prices, and supply chain bottlenecks made it difficult for inflation to improve significantly in the fourth quarter. At the same time, the manufacturing and service industries are booming, and the economy is still able to withstand tightening, posing pressure to raise interest rates again in December and the first quarter of next year. The market currently generally expects to raise interest rates by 1% each in December and the first quarter of next year, with the terminal interest rate reaching 4.25% to 4.50%.

Driven by the stickiness of service prices and rising oil prices, the core PCE rebounded to 3.1% in September. Coupled with the resilience of the manufacturing and service industries, the market expects interest rates to be raised by 1 percentage point each in December and the first quarter of next year, with the terminal interest rate range estimated to be 4.25% to 4.50%. (AFP)

Fees half bottomed out reflect anxiety about cashing out

The Philadelphia Semiconductor Index has plummeted recently and fell below its July low, reflecting that the market's evaluation of AI investment has shifted from the bigger the better in capital expenditures to the review of liquidity and cash flow. The world's largest cloud providers' AWS and cloud computing operators' Azure revenue growth accelerated, indicating that demand for computing power is still strong. However, the total free cash flow of the five largest CSP players in the third quarter turned negative 31 billion U.S. dollars. Capital expenditures exceeded operating cash flow, and some large cloud service players maintained huge investments and purchases. The market is worried that the depreciation, financing and energy costs it will bring will erode returns. In the future, debt or equity issuance will be required to raise funds, which will push up operating leverage, dilute profits and increase credit risks. At the same time, if the growth rate of capital expenditures of CSP companies slows down, it may also compress the profit growth of the semiconductor, power and electromechanical infrastructure groups. On the other hand, in the U.S. midterm elections, the Democratic Party won the majority in both houses of the House of Representatives and won the gubernatorial elections in several large data center states. In the short term, it may tighten the review of local construction licenses, water use, electricity connections, and electricity price sharing, increase construction costs, and delay some projects. High-leverage Neocloud companies are particularly at risk; however, projects that have already started will not be easy to stop, and there is still cross-party consensus on AI productivity and U.S.-China technology competition, and long-term demand will not be reversed. Looking forward to the U.S. stock market, negative cash flow of CSP does not necessarily mean that AI investment has failed. After the market digests financing concerns and realization continues to be verified, high-quality cloud giants are expected to repair their evaluation.

AI external demand drives domestic demand investment to spread across the board

In terms of Taiwan's overall economy, the prosperity countermeasures signal rose to 41 points in September, which has been red for 10 consecutive months, setting a record for the longest consecutive red light in history. Leading indicators have also increased for 14 consecutive months, reflecting that AI external demand, equipment investment and consumption momentum are still strong. However, at the same time, the growth rate of indicators has converged, indicating that the high level of the economy is leveling off. At the same time, Taiwan's GDP in the third quarter increased by 14.36% annually, a record high for the same period in the past 48 years. In addition to the 44.6% annual increase in commodity exports, more importantly, the growth structure has changed. Domestic demand contributed 9.41%, which is higher than the net external demand of 4.94%. Among them, capital formation increased by 26.36% year-on-year, with companies actively expanding production due to high visibility of AI orders; private consumption grew by 5.37%, showing that corporate profits are spreading to domestic demand through investment, wages and wealth effects. Strong exports also include the effect of price and product upgrades. Taiwan has shifted from expansion in shipments to a growth model of high added value, improved pricing capabilities, and driving investment and consumption.

Waiting for the chips to settle to welcome the long-term dividends of AI

Looking forward to the fourth quarter, although the market has heightened doubts about whether the capital expenditure growth of U.S. CSP companies can continue and whether investments can be realized at an accelerated pace, and the possibility of tightening restrictions on data center construction after the Democratic Party wins the election has also added to the uncertainty, the visibility of AI orders from Taiwanese manufacturers is still high, and Vera Rubin is about to increase its volume. Coupled with the gradual easing of supply chain bottlenecks, exports are expected to continue to rise. Domestically, manufacturers' investment in production expansion, real salary growth and stock market wealth effects can also support domestic demand, and the economy is expected to maintain double-digit growth throughout the year. Although economic growth next year will slow down due to the impact of the high base period, the overall fundamentals will still be sound. Recently, the Taiwan stock market has been impacted by factors such as revised evaluations of U.S. AI concept stocks, concerns about CSP cash flow and financing, fluctuations in oil prices and interest rates, and the Democratic Party's victory that may slow down the construction of U.S. AI infrastructure. The short-term retracement exceeded 8,000 points, and there are even voices in the market comparing this round of AI boom to the 2000 dot-com bubble. However, there are obvious differences in the industrial conditions between the two: companies currently investing heavily in AI mostly have strong profitability and sound balance sheets, and the established computing power is still far from enough to meet demand. This is completely different from the situation in the past when the vacancy rate of network infrastructure was high. Therefore, the negative news at this stage is more biased toward short-term bargaining chips and confidence correction. The long-term development trend of AI has not changed, and Taiwan is still the main beneficiary. In terms of operation, it is recommended to wait until the market trend stabilizes and the financing float is significantly reduced, then select high-quality AI leading stocks with long-term competitiveness, adopt a batch and bargain hunting method, and patiently grasp the long-term AI dividends.

(The author is the fund manager of FedEx Equity Investment Department)