The Market Implications of Prime Day & China’s Worrisome Debt-Spending

Memorandum?

Date: July 15th, 2024

To: Joe Rinaldi, President & CIO?

From: Antonia Michaels, Senior Investment Intern

Re: The Market Implications of Prime Day & China’s Worrisome Debt-Spending

Amazon Prime-Day and a Financial Analysis On the Stock:?

Amazon Prime Day is coming up this week, which means more gains for tech investors. Over the past year and a half, Amazon’s stock has reached record heights, pushing its market cap past $2 trillion. A significant factor in this growth has been AI, with tech giants like Microsoft, Apple, and especially Nvidia—whose stock tripled in the past year—also seeing substantial gains.?

For Amazon, this growth marks a comeback since Jeff Bezos stepped down as CEO, a period during which the company lost more than half of its value as revenue growth stalled. This year, Amazon’s operating income is expected to exceed $62 billion, with margins continuing to grow through 2027. This year’s Prime Day is projected to net $13.3 billion in global sales, reflecting stable retail profits.?

However, the real backbone of Amazon’s profits lies in advertising and cloud computing. High revenues from AI projects and introducing ads into the Prime Video service are rapidly expanding Amazon's valuation. Currently, the stock is trading at less than 40 times projected earnings for the next four quarters.?

China’s Worrisome Debt-Spending Practices:?

In 2019, China's economy appeared robust, and the city of Liuzhou planned a modern light-rail system to support a new industrial district. Like many other cities, Liuzhou accumulated trillions in off-the-books debt for development projects. However, unnecessary construction, highways, and failed tourist attractions have made this debt worrisome, indicating that China’s economy may not be as strong as previously thought.

Liuzhou raised millions to fund infrastructure for the expected industrial boom, including amusement parks and tourist attractions. However, the city remains mostly vacant, with unfinished attractions deserted. Economists estimate that this debt is between $7-11 trillion, comparable to China’s central government debt, making it challenging for officials to stimulate the economy. Local government leaders have been blamed for abusing power and leading these expensive projects to failure.?

As municipal debt increased, cities struggled to fund themselves and turned to Local Government Financing Vehicles (LGFVs) to increase deficit spending without the debt appearing on government ledgers. However, these poorly timed and orchestrated projects failed, exacerbating the debt problem. Many city officials did not fully understand LGFVs, leading to tremendous debt with failed attempts at economic growth.?

Despite backlash and criticisms of aggressive and irresponsible use of LGFVs and deficit spending, Chinese cities continue these practices. This year, Liuzhou has issued nine bonds totaling $647 million, further deepening the financial troubles of these cities and China’s economy.