Investors Grow More Confident Fed Will Pull Off a Soft Landing
Mutual funds and hedge funds are putting money in stocks that would benefit from slowing inflation, falling rates
3 min
A few months ago, Wall Street rebuffed the idea that the Federal Reserve would be able to pull off a soft landing.
Now, a growing crowd is betting on exactly that happening.
Mutual funds and hedge funds managing roughly $4.8 trillion in assets have been putting money into stocks that stand to benefit from inflation cooling, interest rates going down and the U.S. economy avoiding a recession, according to an analysis by Goldman Sachs Group Inc.
The investors have larger-than-average positions in shares of industrial, materials and energy companies, Goldman’s analysis found. All three groups tend to be sensitive to changes in the economy, meaning investors’ bets should eventually pay off if the U.S. can avoid a deep and prolonged downturn, or a “hard landing.”
Recent data have offered investors some hope for that scenario. The labour market has remained strong, with the unemployment rate clocking in at a historically low 3.7% last month. Consumer spending is up. And there are signs that inflation is easing. Consumer prices rose 7.7% last month, a brisk clip but nevertheless the smallest year-over-year gain since January.
It is looking increasingly likely that the U.S. will be spared “the typical scar tissue of a steep economic downturn,” Katie Nixon, chief investment officer for Northern Trust Wealth Management, said in written comments.
The debate still rages on Wall Street, of course, and other investors say a deeper recession could be looming.
There are additional challenges remaining—one of them being a red-hot labour market. In a speech last month, Federal Reserve Chair Jerome Powell implied that wages are still growing too quickly to allow inflation to return to the central bank’s 2% target.
Investors might get some clarity on both inflation and the Fed’s thinking in coming days.
The Labor Department will release its November reading for the consumer-price index Tuesday. The report will offer the Fed its last look at inflation before it announces its final interest-rate decision of the year on Wednesday.
The central bank is widely expected to raise rates by half a percentage point. That would mark its smallest rate increase since March, when it began tightening monetary policy once again. But a surprisingly strong inflation reading could throw into question the Fed’s plans to slow its pace of interest-rate increases in 2023. Stocks fell Friday and suffered weekly losses after data showed producer prices rose more than expected in November.
“Everybody is going to be looking at the direction of that CPI number,” said Brian Overby, senior markets strategist at Ally. “As long as we’re going in the right direction, it doesn’t even have to be a big number to the downside.”
History doesn’t favour the Fed. Data from the central bank show the economy fell into recession nine of the past 12 times the Fed tightened monetary policy.
A downturn would likely put more pressure on an already beaten-down market.
Stocks are up significantly from their October lows. Butthe S&P 500 is still down 17% for the year, on course for its worst annual performance since the 2008 financial crisis.
The stock market has typically fallen roughly 30% in recessions going back to 1929, according to Dow Jones Market Data.
Still, analysts and economists at a number of firms, including Goldman Sachs, BMO Wealth Management and Credit Suisse Group AG, are predicting the economy will be able to avoid a hard landing next year.
“The most significant challenges to consumer spending are most likely in the past,” Goldman economist Joseph Briggs wrote in a note. The bank expects inflation to continue moderating next year, but the unemployment rate rising only to around 4.1% from the current 3.7%.
Whether there winds up being a recession or not, many say they are in agreement on one thing: Markets are likely to remain volatile for some time.
“2022 wasn’t a picnic, but it was clear that [the Fed] had to tighten policy,” said Christopher Smart, chief global strategist at Barings and head of the Barings Investment Institute.
The Fed’s path over the coming months—and consequently, the markets’ outlook—looks less straightforward, Mr. Smart said.
He added that, in the near term, he is recommending that clients hold on to extra cash to navigate swings in the markets.
“It depends on how low inflation will go and how long it will take to get there. And that determines what kind of potential damage will come along the way,” Mr. Smart said.
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Supplier Foxconn plans to build more factories and give India a production role once limited mostly to China
4 min
Apple and its suppliers aim to build more than 50 million iPhones in India annually within the next two to three years, with additional tens of millions of units planned after that, according to people involved.
If the plans are achieved, India would account for a quarter of global iPhone production and take further share toward the end of the decade. China will remain the largest iPhone producer.
Apple has gradually boosted its reliance on India in recent years despite challenges including rickety infrastructure and restrictive labor rules that often make doing business harder than in China. Among other issues, labor unions retain clout even in business-friendly states and are pushing back on an effort by companies to get permission for 12-hour work days, which Apple suppliers find helpful during crunch periods.
Apple and its suppliers, led by Taiwan-based Foxconn Technology Group, generally believe the initial push into India has gone well and are laying the groundwork for a bigger expansion, say people involved in the supply chain.
Apple is emblematic of a move among companies worried about over dependence on China to move parts of their supply chains elsewhere, most often to Southeast Asia and South Asia. Diplomatic efforts by the U.S. and its allies to block Beijing’s access to advanced technology and strengthen ties with New Delhi have accelerated the trend.
The first phase of a Foxconn plant under construction in the southern state of Karnataka is expected to start operating in April, and the plant aims to make 20 million mobile handsets annually, mainly iPhones, within the next two to three years, said people with direct knowledge of the construction plans.
A further iPhone-producing mega plant is on Foxconn’s drawing board with capacity similar to the one in Karnataka, although the plans are still in a nascent stage, the people said.
Apple has also chosen India as its site for a manufacturing stage for lower-end iPhones to be sold in 2025. In this stage, known as new product introduction, Apple’s teams work with contractors in translating product blueprints and prototypes into a detailed manufacturing plan. Until now, that work was done only in China.
Combined with plans for expanded production at an existing Foxconn plant near Chennai and at another existing plant recently bought by Indian conglomerate Tata, these developments signify that Apple intends to have the capacity to make at least 50 million to 60 million iPhones in India annually within two to three years, said people involved in the planning.
Annual capacity could grow by tens of millions of units after that.
Foxconn indicated its commitment to India by announcing on Nov. 27 that it was investing the equivalent of more than $1.5 billion in the country, money that people familiar with the matter said would include production for Apple. The announcement didn’t mention the iPhone or name specific locations.
Global iPhone shipments last year totalled more than 220 million, according to research firm Counterpoint, a number that has remained steady in recent years. Because almost all iPhones are made in either China or India, China will continue to account for well over half of iPhone output.
Apple has faced challenges in China this year beyond trade tensions with the U.S., including the Chinese government instructing some officials not to use iPhones at work.
“India’s trust factor is very high,” said Ashwini Vaishnaw, India’s information technology minister.
This year, for the first time, India-made iPhones were introduced on the first day of global sales of the latest model, eliminating the lag with China-made phones.
Supply-chain executives say hourly wages are now significantly lower in India than in China, but other costs such as transport remain higher, and labor unions sometimes resist rule changes sought by manufacturers.
In May, the chief minister of Tamil Nadu state, where Foxconn’s flagship Chennai plant is located, said he would withdraw regulations allowing a 12-hour workday, weeks after the state passed an amendment authorising the longer hours. The chief minister, M.K. Stalin, attributed the decision to opposition from labor activists.
Karnataka state has stood by a decision earlier this year to extend the workday to 12 hours, up from a previous limit of nine hours, though companies must seek approval to do so. A state labor official, G. Manjunath, said new rules also allow companies to employ women on overnight shifts without seeking government approval.
After years of battling local-content rules and other red tape, Apple this year opened its first retail stores in India. Abhilash Kumar, an India-based analyst at TechInsights, said the top-of-the-line iPhone 15 Pro Max was selling well in the country, though it costs about $700 more than in the U.S.
Apple is also making progress in India toward building a network of core suppliers, long a strength of Chinese manufacturing. Officials said this week that Japanese battery maker TDK would build a new factory in India’s Haryana state to manufacture battery cells to power Indian-made iPhones. A TDK spokesman declined to comment.
The moves don’t mean Apple and its suppliers are leaving China. Apple Chief Executive Tim Cook has traveled to China twice this year, stressing the country’s importance as a production hub and consumer market. He visited Luxshare, a China-based assembler that is taking a bigger role in the China portion of iPhone assembly.
On social media, Apple has assured Chinese consumers that iPhones selling in authorised channels are made in China. At an industry event in Beijing that Chinese premier Li Qiang attended in late November, Apple’s booth stressed the company’s business with Chinese suppliers.
Foxconn Chairman Young Liu said in November that China would continue to account for the largest share of Foxconn’s capital investment next year.
Liu has visited India at least three times in the past year and a half, meeting Prime Minister Narendra Modi and other officials. People involved in the planning said Modi’s home state of Gujarat in the west was one possible site of a future Foxconn plant. Meanwhile, the company has other projects in the works in the southern half of the country for electronic components and a plant likely to focus on making AirPods for Apple.
The plant in Karnataka state is under construction on 300 acres of land near the airport in Bengaluru, a southern city that is considered India’s tech hub. Officials involved in the planning said Foxconn has secured approval to invest nearly $1 billion in the plant and is seeking the go-ahead to put in an additional $600 million or so.
Combined with other projects, Foxconn’s investments in the state are likely to reach around $2.7 billion, they said.
Some iPhones are also made at a plant near Bengaluru that India’s Tata Electronics agreed in October to buy from Taiwan’s Wistron. Tata Group is the first local company to take on manufacturing iPhones.
“Apple has created an additional spoke in its India strategy by roping in the country’s largest business group—Tata—to be a part of its manufacturing system in addition to Foxconn,” said India’s junior information-technology minister, Rajeev Chandrasekhar.
—Shan Li in New Delhi and Selina Cheng in Hong Kong contributed to this article.
Consumers are going to gravitate toward applications powered by the buzzy new technology, analyst Michael Wolf predicts
Chris Dixon, a partner who led the charge, says he has a ‘very long-term horizon’
