Five insights in five minutes
Club Fangs was a cooler name back in the day, before Apple and Microsoft became too rich to exclude and a trillion-dollar membership fee pushed Netflix out the door. But despite a rubbish new acronym, the group which includes Facebook, Amazon, and Alphabet (G for Google) is still where tech-watchers look for inspiration. So what’s happening? An eight per cent correction since the beginning of May has knocked about a tenth off the forward earnings multiple for the five, down to a cap weighted average of 30 times. Although a 40 per cent premium to the rest of the market, three of the five are not even in the top quintile on that basis anymore, while the median FAAMG stock now is only 15 per cent dearer than the median S&P 500 name. And they are still expected to grow their revenues twice as fast as the market this year despite making up a fifth of the index. Thank goodness they enjoy each other’s company, as can be seen in the chart below.
Themes: US equities, technology stocks
Our strategists have gone under the hood to take a closer look at what’s powering the current commodities cycle. That US consumption is injecting high-octane fuel is no surprise, accounting for nearly 70 per cent of an economy that makes up a quarter of global output. Tellingly, purchases of durable goods such as electronics and cars were up 15 per cent last quarter versus pre-Covid levels. Spending on housing was more than a fifth higher, as Americans splurged for bigger spaces. When these distortions return to normal, China’s dominant role as a consumer of commodities becomes more important. Just this month the country took actions aimed at slowing the upward march in prices. However, the 70 per cent rise for industrial metals over the past year will be hard to slow given booming global infrastructure plans. Likewise, similar gains in agricultural prices are underpinned by population growth and dwindling arable land. Inflation hedges? Probably as good as any.
Themes: macro, commodities, inflation
The ‘G’ in ESG
Companies are slowly getting the message on governance, with disclosure scores recorded by Bloomberg improving by seven per cent globally between 2015 and 2019, as shown in the chart. Even Warren Buffett penned the importance of corporate governance in last year’s Berkshire Hathaway shareholder letter. But attention so far has mainly been on stone-cold quantitative data rather than the qualitative aspects captured in board effectiveness reviews, such as board dynamics. These behavioural characteristics matter. A recent HSBC report explained that when predicting corporate profitability, the impact of board teamwork is eight times greater than individual director demographics. Though internal annual reviews are mandatory in the UK, France, Spain and Italy, as well as external reviews every three years, only 40 per cent of listed companies in Europe do the latter. This is despite three quarters of investors showing a high level of interest in these evaluations when asked in a UK based 2018 survey. The solution? More engagement on questions surrounding the strengths and weaknesses of boards.
Last week China became the second country to successfully land on Mars. Such milestones won’t stop there, with the mainland’s economy set to pull even with America’s by the end of the decade, based on IMF projections. Emerging Asia, meanwhile, consisting of China, India and ASEAN countries, already eclipses the US economy and should account for nearly a third of global output by 2030. Perhaps President Biden was musing over these statistics when he proposed the USD2 trillion US infrastructure investment package. Yet not much can stop this transition, with annual new investment in mainland China forecast to outpace that of the US and the rest of the world for years to come. Nonetheless, Asia should cheer for more US spending. America remains the largest source of incremental import demand globally, contributing to Asian exports and growth – even as China’s grip on global trade remains strong, as per the chart below.
Themes: Asian assets
Virtual currencies have endured a horrid fortnight after the publication of an interview with HSBC Asset Management’s Nicolas Moreau in Funds Europe, in which he said he was ‘sceptical’ of bitcoin, not least because ‘it consumes so much energy’. Inspired, Tesla boss Elon Musk jumped on the bandwagon two days later with his now-infamous ‘insane’ Tweet. Combined with Beijing reiterating its total ban on Wednesday, the value of all tokens in circulation has dropped by more than half a trillion dollars in the past week. As the price of bitcoin fell below USD40,000 – down 40 per cent from its peak last month – gold has rallied by a tenth. There is no logical reason why this should occur, despite the belief of bitcoin disciples that the two are somehow substitutes. Sure this has been the case since August, but as you can see from the chart, over the longer term gold and bitcoin have moved in tandem if anything – with a positive correlation of 0.6 over the past five years. And don’t forget that the log scale masks some insane volatility. Investors are best advised not to compare bitcoin with anything tangible at all.
Themes: alternative assets, commodities
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