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Editor's Note: Hamish Risk | October 21, 2020
While every investor is naturally looking for the next Amazon, in today’s Macro Briefing we delve into the possibility that the best days for big tech investors may be behind them as price action in Netflix suggest the sector may be moving beyond the pandemic surge and into a new competitive era that will herald a consolidation in valuations. Meanwhile Ollari Consulting explains why the current euphoria in many markets – partly triggered by hopes of a fresh US stimulus deal – is overdone, while Goldman Sachs sets out why a stimulus package is unlikely before the election and HSBC warns against complacency ahead of the vote and why FX investors should look towards haven currencies. Elsewhere, Pantheon Economic explains why Brexit uncertainty will continue to weigh on UK equities as the British government continues to test the limits of any agreement with the EU.
earnings FAANGs Liberum
1. Finding the next Amazon and why big tech can’t keep shooting out the lightsFinding the next Amazon before it becomes the next Amazon is the ambition of every investor, but it is – fairly evidently – a difficult task, says Joachim Klement at Liberum. He points to analysis by Henrik Bessembinder, an academic at Arizona State Univeristy, who has attempted to predict future star performers by looking at the characteristics of the best and worst 200 stocks by decade. Bessembinder found future top performers tended to be younger companies with lots of growth possibilities – companies with a shaky past that had to learn their lessons from past failures and disappointments and invested heavily in research and development to create a superior product or service. While that might sound easy, the problem, says Klement, is that only explained 2% of returns over the subsequent decade, with 98% unexplained. In other words, he says, those criteria can give you an indication of what company might do well in the long run, but they are by no means a sure thing, and other factors, including sheer luck will still play an important role in any company that wants to become the next Amazon. But what happens to Amazon after it has become the next Amazon? That has become a talking point after third-quarter results Netflix appeared to show that the pandemic bump for big tech may be over. Shares in the Netflix slumped after paid subscribers for the viewing platform missed expectations, rising 2.2 million against consensus forecasts around 3.3 million. Although as some analysts, point out, Netflix could have chosen its words more carefully – companies don’t really want to blame record quarters for subsequent misses – the drop-off is understandable considering the circumstances. After all, when everyone is forced by government decree to stay home and binge watch all the series they’ve been meaning to catch up on, you can expect subs to surge, and that will naturally weigh on growth in subsequent quarters, especially as customers are anxious to get outside again and do the things they were forbidden from doing during the crisis. That of course, can be said for the other big tech firms that have benefited from the pandemic surge, but it misses another reason that may drive a correction in valuations going forward: increasing competition among the major players. Most observers agree that the Covid-19 pandemic has permanently accelerated the digital transformation, which should logically mean the end game is unchanged, but only reached faster. Some, like CLSA, believe that that now as the reality of the temporary nature of the pandemic-induced growth jump and the competition this has inspired sets in, there will be an inevitable consolidation in share prices across the sector.
reflation trade Ollari Consulting
2. So come on, let me reflate youAs the prospect of the fresh US stimulus package dominates the headlines, Christophe Ollari at Ollari Consulting raises concerns over current market price action that indicates a strengthening of reflationary momentum. The dollar, renminbi, Treasuries, precious metals, copper and even the laggards, such as agricultural commodities, are all at critical levels, he says, with the fundamental weakness of the dollar and the powerful reversal of the Chinese currency pointing to a return of the reflationary dynamic that has only been supported by positive signs of a fresh deal in Washington. Positioning levels too reflect reflationary optimism notes Ollari, with those in copper and Treasuries much higher than levels seen prior to the 2016 US presidential election and equities’ leveraging surging , with gross exposure back to pre-covid levels for most investor types. He warns, however, that a fresh stimulus package is not guaranteed, there is still a US presidential election to get through and the covid pandemic, far from disappearing, is threatening to produce a third wave of hospitalisations in the US. Furthermore, in the medium term, Ollari contends that the post-covid world will not be like post-GFC, with a shift from a focus on financial QE to social QE. In other words, he says, notwithstanding just the potential short-term stumbling blocks the current reflationary rotation is colliding with what he calls a “secular slowflationary” dynamic, and he is amazed – not to say concerned – by the current euphoria.
US fiscal stimulus Goldman Sachs
3. Pre-election fiscal stimulus – still unlikelyAlec Phillips at Goldman Sachs says despite an optimistic tone and a slight narrowing of differences, the odds of pre-election US fiscal stimulus continue to look very low. Negotiations are likely to continue, because neither side benefits from ending them, he says, but some of the biggest issues remain unresolved and a deal doesn’t seem particularly close. Ongoing talks could influence what happens in a lame-duck session of Congress in November and December, but the election outcome is likely to be the more important factor at that point, according to Phillips. He says under a status quo result, it seems likely that the bill currently being negotiated could pass in a lame-duck session of Congress in November or December. If Democrats win the White House or the Senate, however, Phillips believes the odds of a stimulus passing in the lame-duck session would be much lower, as Senate Republicans would likely object to a large package, and congressional Democrats would have little incentive to pass a scaled-down bill when they could pass a much larger bill in early 2021.
4. FX; Electing to be differentThe US election is likely to dominate FX market thinking in the short term, according to Daragh Maher at HSBC, with any excitement likely to have to wait for the result as the run-up is likely to be rather tame, unless the opinion polls begin to point to a much closer contest for the presidency. This suggests a range-trading environment for much of G10 FX, however, he believes those ranges are more likely to face a break-out in a risk-off direction. As Maher notes, much of the FX market’s current mind-set seems to reflect a hopeful perspective, whether it is regarding the implications of the likely US election result for risk appetite, the scope for US fiscal stimulus, the likely path of Brexit negotiations, or the ability of the eurozone economy to weather the current upswing in COVID-19 infections. He is more cautious, however, and is not convinced that a Democratic Party “clean sweep” outcome in the US election guarantees a risk-on response. The optimistic view requires a selective approach to the Democratic election manifesto, according to Maher, ignoring the headwinds to risk appetite that higher corporate taxes and heightened regulation of tech might bring. Additionally, he says, any narrowing in the opinion polls ahead of the election may see concerns about a contested outcome rise, again driving a risk-off mood. The balance of risks favours the “safe-haven” currencies, in Maher’s opinion, with the JPY perhaps best placed to capitalise on a risk-off environment as USD gains may be tempered by the US-centric nature of the risk events, while the CHF faces possible SNB intervention. Therefore HSBC say NOKSEK may provide a more cautious way to benefit from declining risk appetite.
Brexit UK equities Pantheon Macro
5. Will UK equities reverse their underperformance after a Brexit deal?UK equities have been unable to catch a break this year says Samuel Tombs at Pantheon Economics, who calculates UK stock prices currently are about 12% below the level in the US and the rest of Europe, after adjusting for sectoral composition and the long-run average gap between P/E ratios. The gap at the start of this year was just 5%, he notes and believes this relative deterioration can be ascribed chiefly to concerns that Brexit trade talks will result either in no-deal or in such a thin deal that the profits of UK businesses are hit hard. All this suggests that UK equities will pick up at the end of this year, if as Tombs expects, a trade deal is signed at the last moment. Much, however, will depend on the terms of the deal, he says, and whether all issues are settled, providing investors with some much-needed certainty. In reality, Brexit likely will remain a process, not an event, according to Tombs, and the UK government will continue to test the limits of any agreement—for example, by potentially flouting rules on state aid or internal customs checks— leading investors to doubt whether the trade deal will last. Lingering Brexit uncertainty and poor industry specialisations mean it remains difficult to be bullish on UK equities, he says.