Buy Real Estate, Gold, Memory Chip Stocks

Publish date: 2024-07-10

Four seasoned investors share ideas on where to find the best investment opportunities today.

July 17, 2023, 11:30 AM UTC

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Investors are confronting a wall of worries.

There’s inflation, rising interest rates, the narrow slice of mega-cap tech stocks fueling the S&P 500’s rise, concerns about a credit crunch and fear of a looming recession — aside from, of course, the war in Ukraine and the seemingly fragile state of geopolitics among the world’s most powerful nations.

It’s enough to make an investor want to curl up with cash. But while prudent diversification and the hedging of one’s bets is a good way to make sure you’re not taking on more risk than you can handle, running away from risk entirely means missed opportunities.

The four investment experts whose views follow point to areas where they see the right mix of risk and reward. Some are decidedly defensive — investing in gold, for one — while others look to AI plays in memory semiconductor stocks and to alternative asset strategies designed to zig when traditional asset classes zag.

When the experts were asked where they might put $10,000 in a personal interest, ideas ranged flying in vintage aircraft like the iconic World War II Spitfire to buying real estate as a play on shifting supply chains.

Gold May Shine

The idea: Year-to-date, most asset classes are benefiting from expectations that the Fed’s tightening cycle is close to an end. If that assumption proves correct, gold may be one of the prime beneficiaries.

The strategy: In contrast to last year, which featured an unrelenting rise in both the dollar and interest rates, 2023 has been characterized by a more range-bound bond market and muted moves in the US dollar — two developments that support gold. While many investors treat gold as an inflation hedge, the relationship between gold and inflation is more nuanced. Historically, gold has been a decent inflation hedge, but only over the very long-term. For shorter horizons, gold tends to trade with real, or inflation-adjusted, interest rates and the dollar. If rates, particularly real rates, and the dollar are falling, gold is generally rising.

The big picture: The odds are that the Fed is reaching the end of its tightening cycle. If this proves true, flat to lower real rates should help gold, even more so if sticky inflation in Europe forces the European Central Bank to continue to raise rates, further pressuring the dollar. Outside of monetary policy, gold would likely benefit, as it did in early 2022, if geopolitical tension rises. Assuming growth and inflation continue to soften, gold can continue its ascent.

Demand for Memory

The idea: Memory semiconductor stocks trade at significantly lower valuations compared with technology sector leaders. This presents an attractive opportunity for investors to capitalize on the industry’s growth potential.

The strategy: The semiconductor industry, known for massive capital costs and volatile cycles, has witnessed consolidation into three dominant memory semiconductor companies. However, the latest memory chip cycle faced unprecedented challenges due to the pandemic, resulting in inventory overstocking and declining profitability. The demand for memory chips is now rapidly improving, and the three industry giants are cutting capacity while anticipating a surge in demand across sectors including electric vehicles and AI applications.

In particular, high-performance AI server chips require powerful memory, such as high bandwidth memory (HBM), which enables the processing of vast amounts of data, analyzing patterns in text, audio, video, and generating human-like content. The two leading South Korean chip manufacturers hold 80% to 90% market share in HBM, although Micron is expected to catch up in the next few years.

The big picture: Major tech players, such as Nvidia and AMD, have recognized the advantage of increased memory capacity for enhanced performance of large language models (LLMs). By running the LLM directly on memory, they can reduce the number of GPUs needed per job, resulting in cost savings as AI model sizes continue to grow. Furthermore, the demand for memory content is rising due to the increasing prevalence of AI servers and the integration of more memory into advanced AI server chips.

Hedging Risk

The idea: We expect US and global economies to fall into recession later this year, as the impact of higher rates limits credit availability. Slowing growth will likely see headline inflation fall, boosting the outlook for US Treasury bonds and defensive equities such as food and beverage stocks, pharmaceuticals and utilities. Lower inflation also means weaker pricing power, falling earnings and rising unemployment, which tend to undermine cyclical stocks, including the high-valuation US technology plays.

The strategy: With inflation coming down and activity slowing, 5-year US Treasuries, which currently yield about 4%, look attractive. We would also look to gain some protection to the low level of ‘risk’ priced into the markets by buying a volatility (VIX)-related ETF. Just eight large tech companies account for 75% of the gains in the S&P 500 since the start of the year, driven by hype about the prospect for AI. We believe this optimism is now overdone.

The big picture: Tighter bank lending standards such as we’ve seen in the wake of the collapse of Silicon Valley Bank would typically lead to slower credit growth up to a year later, suggesting the real credit crunch has not yet started. In previous cycles, looking for signs of bank lending weakness would have been enough. However, more than 50% of global financial assets are controlled by non-bank financials such as private credit, private equity and fintech. Many of these new growth areas of finance have business and funding models untested for a world of higher rates and reduced liquidity availability, and we expect market volatility to rise by year-end.

Find Uncorrelated Assets

The idea: Diversify away from stocks and bonds into something that can do well in times of stagflation, when both of those asset classes should be struggling. For this purpose, we like managed futures funds focused on macroeconomic trends, which can tap opportunities — both going long and short — in asset classes that move differently from stocks and bonds.

The strategy: Managers in this space tend to use rules-based, systematic approaches to find developing trends in various global asset classes including currencies, precious metals, industrial metals, energy markets, grains, soft commodities, bonds and equities. This ’go anywhere,’ flexible, long/short approach extends the opportunity set beyond just equities and bonds and other ’good weather’ investments. Buyer beware, though — strategies like this are psychologically difficult to hold during the good times.

The big picture: We’ve already seen the first signs of stagflation-like consequences, with both equities and bonds declining in 2022. Valuations and breadth in stocks are currently at very fragile levels, and most government bonds are back under pressure in early July 2023.

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