Big tech is setting the tone for the UK market, says HAMISH MCRAE: US sentiment is the biggest driver of what is happening here
The week ahead is a big week for Wall Street, and that has big implications for us here. Three of the four most valuable companies in the US report first-quarter figures: Microsoft, Amazon and Alphabet, Google’s parent company. And Meta Platforms, owner of Facebook, also reports.
We’ll have to wait another week to get results from Apple, the largest of them all by market capitalization, but these results will give us justification – or not – for the recovery of big-tech America’s stock prices.
You may remember the hoo-ha of Apple becoming the first ever company to be worth $3 trillion by the end of 2021. The value then fell to about $2.2 trillion, wiping out a huge amount of wealth, but now it’s back to over $2.2 trillion. $2.6 trillion.
The stock has risen by a third since the beginning of this year. Microsoft is up nearly 20 percent, Amazon 21 percent and Alphabet 18 percent. Can the recovery be sustained?
This is very important for the UK and European markets, as US investor sentiment is probably the main driver of what is happening here.
Crucially, the week ahead is a big one for Wall Street, and that has big implications for us here
Last month saw an intriguing example of both the power and limits of big money. At the height of the panic over European banks, the collapse of Credit Suisse and so on, global funds were short-selling a range of European banking stocks. Reuters reports that they made a profit of £2.2 billion in March from these sales. But so far this month, calculations from analytics firm Ortex suggest they lost £805 million as share prices recovered.
The response from most of us will be that it suits them, and it’s a shame they didn’t lose more. But once we get over our gloating, consider this. That fall in bank stock prices, exacerbated by the short sellers, was actually a great opportunity for value investors looking to buy into solid financials at bargain prices.
Shares of Italian banking group Unicredit have since risen 35 percent to their highest since 2016. Shares of Barclays took a big hit, falling from a peak of just under 190 pence in early February to 134 pence at the end of March. Now they’re back above 150 pence, which puts them at a price-to-earnings ratio of just over 5.1 and a dividend yield of 4.75 percent.
Equities have underperformed in recent decades and banking remains an extremely old-fashioned industry. But that P/E ratio says either very bad news is imminent or they are very cheap. Lloyds and NatWest have valued P/E ratios of 6.8 and 7.6, almost as low.
The point here is not to urge anyone to get into bank stocks. Rather, it’s to point out that the idea of value investing still lives in the doghouse. For what it’s worth, the Nasdaq index of U.S. high-tech companies is up 16 percent year-to-date (though significantly down from its November 2021 peak), while the Footsie is up only 5 percent (although only about 100 percent ). points since the peak last February).
So come this week, let’s look for two things. One will be sort of an indication of whether the recovery in sentiment about big tech America is intact.
How are the earnings and what do the giants say about the trading conditions? There is near consensus as the US will experience a mild recession later this year, so future demand prospects may be more important than Q1 results. We may have to wait another week and get further guidance from Apple, but we’re moving toward some sort of clarity.
The other thing is what’s happening here. We are in reporting season and my impression is that some decent results will leave UK institutions wondering if they really were smart enough to scoop all of their depositors’ money abroad or into government bonds.
Even more relevant, is that what their customers who are saving for retirement want them to do?
If private equity firms can see value and bid for UK companies, how long before UK institutional investors get the message? But shifts in sentiment almost always happen painfully slowly and this is no exception.
What is beyond dispute is that a crucial period is coming, when investors on both sides of the Atlantic will be looking for direction on those two eternal questions. Should this summer be one for equities or fixed income? And if you go for equities, which you have to to some extent, is it value or growth?
My instinct is stocks and value, but let’s see if the pros agree.