Please find below our Investment Market Update as at 4th September 2020.
Blue Sky Investment Market Update
Tech stocks wobble
Apple and Tesla split their stocks on Monday to allow greater accessibility to investors, but yesterday Apple shares closed down by 8% and Tesla 9%.The Nasdaq finished down 5% and the S&P 500 fell by 3.5%.
However, just to add some context, on Monday, Apple shares rose 3.3% whilst Tesla shares posted a 12.5% gain. Both stocks closed at record highs.
What the tech is going on?
I wrote about the dynamics of the tech sector a few weeks back and the rotation in some quarters towards other tech stocks in the ‘supply chain’. However, the prices of the ‘big 4’ continued to rise. Yesterday’s drop on the Nasdaq, the biggest one day fall since March, is a welcome respite and a reminder of the concentration risk of a few shares dominating the market.
We have been concerned about such valuations becoming stretched and, in our minds, we see this as a healthy pull-back. Not just for the tech sector but for the overall market.
It was interesting to hear the comments from Legal & General’s Investment Management this week (this is where I lifted the heading from) around technology. They asked the question, “is it time to sell or hold on for the ride?”.
Outperformance has been driven by superior earnings rather than by valuations. In fact, the PE (Price/Earnings) relative remains roughly where it was in January.
Whilst the ‘big 4’ have seen their share prices soar, Legal & General’s Investment Management don’t see signs of excessive bullishness in the tech space as a whole. The most recent institutional investor surveys showed a small decline in positioning in this sector. Retail investors actually remain underweight in the sector according to recent data.
Legal & General’s Investment Management therefore continue to hold but it’s worth remembering that they have diversified across the technology spectrum.
It’s worth noting too, that today we are to send a switch notice for our Momentum portfolio, adjusting our technology weightings.
The broader market
It was interesting on Wednesday when technology stocks began to wobble, that the broader market rose with the S&P 500 rising by 1.5%. A good sign of a broader recovery and increased confidence regarding a general economic bounce back.
It was reported in Bloomberg that as some of the year’s best performers tumbled, more economically sensitive industries, including banks and energy, gained. Stocks that stand to benefit most from an economic reopening, including airlines and cruises, surged too. Carnival Corp. and Norwegian Cruise Line Holdings each jumped more than 8%.
Lots of positive news supporting equities
- Negative interest rates (in real terms) won’t reverse soon, which is supportive of equities. With interest rates being so low and gilt yields falling, then it’s no surprise that equities have attracted support, especially with the stimulus from central banks.
- The Bank of England is ready to commit more money to quantitative easing and asset purchases if needed. However, the Governor, Andrew Bailey said that inflation in August was higher than expected. The big fear, of course, is deflation.
- Germany expects the economic fallout from Covid-19 will be lower than expected.
- The US budget deficit will exceed 100% of GDP for the first time since 1945. However, the shortfall is smaller than the Congressional Budget Office anticipated.
- Global trade appears to be on course to recover more quickly than after the 2008 financial crisis, according to the Kiel Institute for the World Economy. Shipping volumes are already back at levels that took more than a year to reach following the collapse of Lehman Brothers.
And finally, everything’s rosy in the property market
Apparently, one in seven homes in the UK are selling within a week, more than double the amount from this time last year, helped of course by the reductions in Stamp Duty. Homes in London are selling at the slowest and Scotland the fastest, according to Rightmove.
Enjoy the weekend.
Gary and the Investment Team
Please Note: This communication should not be read as giving specific advice regarding your personal circumstances. This would only be given following detailed assessment of your individual needs. The value of investments may fall as well as rise; you may get back less than invested. Past performance is not necessarily a guide to future returns.