All posts in category: Technology (22)

Worlds Apart

Monday, June 26th, 2023

US Megacaps are behaving like a separate asset class

For some time, we have been discussing with clients the possibility of dividing up the equity universe in a different way, to give us more flexibility with our regional equity allocation. To do this, we would have to split the US into two. There are many ways in which this could be done, but it is really hard (actually impossible) to come up with financial metrics or thematic approaches which would give us a consistently applicable framework, without lots of anomalies. So, we opted for a really simple definition: the top 10 stocks, from time to time, vs the rest. These typically account for just over 40% of the market capitalisation of the S&P500. We find clear evidence that this group behaves differently from the rest of the US, often having an overweight position, when the rest of the US is underweight. As far as the current situation is concerned, we suggest that the right way to fund an increased exposure to Nasdaq, FAANG or Megacaps, is not to sell European stocks, but the rest of US equities.

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Weak Tech, Weak Dollar

Friday, January 13th, 2023

Welcome to the new regime, which could last a long time

Our models don’t like US Equities or US Treasuries and they don’t like the dollar either. This is an unusual set of circumstances, but one which we think we can explain. The key is to understand the relationship between tighter US monetary policy, lower valuations for mega-cap tech and the unravelling narrative of US exceptionalism. US Bond yields may be rising, but yields in other currencies are rising faster. We strongly recommend that investors reduce their exposure to US Equities and increase their exposure first to Europe and then later to Emerging Markets.

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Santa’s Merry Massacre

Friday, December 2nd, 2022

What Santa gives the New Year can take away

Recent strength is US and global equities is entirely consistent with normal seasonality, particularly the outperformance of the Eurozone. If normal seasonal patterns prevail, we would expect many of the recent trends to reverse in the New Year as follows: US equities will give up recent gains, Eurozone equities will underperform, US Technology will suffer further declines and the US dollar will strengthen once again. All of this would be consistent with normal seasonality, as is our new call that the bottom of the bear market will not come until Q3 2023 at the earliest.

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So Much Choice

Friday, February 4th, 2022

The opposite to US growth is not US value

If investors decide to get out of the growth style in the US, there are several other strategies they can follow apart from US value: (1) low volatility in US equities; (2) growth in non-US equities; (3) low volatility in other US asset classes; (4) non-US value. The problem with the value style is that cheap stocks tend to stay cheap, unless there is a clear and obvious catalyst for them to outperform, like a massive earnings surprise (as in Energy) or a surge in corporate activity (which may happen in the UK). We think the most popular destination for flows out of US growth will be low volatility in US equities, into sectors such as Consumer Staples and, possibly, Utilities.

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Groundhog Day for Value

Friday, January 7th, 2022

Everything depends on the slope of the yield curve

We see lots of commentary suggesting that the value style is going to outperform the growth style in Europe and the US. We also see this being used as a reason for rebalancing global equity portfolios away from the US and towards Europe. We disagree with both ideas and also with the big idea behind them, which is that government yield curves are going to shift higher and/or steepen at the same time. Indeed, the recent behaviour of US Financials suggests that investors are becoming concerned about the yield curve inverting over the medium term. We also think that the new emphasis on ESG guidelines makes the value/growth trade much more complex than it used to be.

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Time for Some Bottom-Fishing

Friday, November 26th, 2021

Chinese Technology could lead a rally in EM Equities

We spend a lot of our time dissuading clients from going bottom-fishing, mainly because it doesn’t work very well. But there are times when we may need to do it to protect ourselves from the risk of being underweight a sector or country which rallies very fast. This week we highlight a combination of charts (EM Equities and China vs the World and Chinese Technology vs China) which have all sent recent signals suggesting that we may need to close our underweight positions in a hurry. There is a risk/opportunity that Chinese Technology could lead sharp and unexpected rally in EM Equities.

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So, You Want to Buy the Dip

Thursday, May 20th, 2021

Three rules for how to do it

Nothing in the last two weeks has changed our view that a correction in global equities is coming. If you are one of those investors who has waited all year to buy the dip, we have three rules about how to do it. One, decide your tactics in advance and don’t pay too much attention to the narrative behind the correction. Two, don’t add complexity to a market timing trade by using it to rebalance your equity portfolio. Three, if you want to front run a correction, make sure you have enough defensive exposure at a sector level. Our top pick here is European Telecom.

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Rotation, Inflection & Persistence

Friday, November 13th, 2020

The bottom is not bouncing to the top

There has been a lot of excitement about factor rotation in equities, but it’s mostly based on the back of two days’ trading at the start of this week. We agree that rotation is going to pick up, but from a very low base and our work suggests that it’s going to be from the top to the middle and vice versa. We think that the laggards, like Financials, Energy and Telecom could underperform for some time to come. If the factors in question are meaningful, they will show up in sector performance fairly soon. If not, perhaps they are not as important as reported.

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FAANGs can bite you

Friday, October 16th, 2020

Some US Tech giants are already rated underweight

We re-iterate our call to take profits in US Tech. We have downgraded Communications to neutral this week and we already have Google/Alphabet as an underweight. The Tech sector broke down through an important technical signal in late August and is now accelerating towards a downgrade. Leading stocks like Microsoft have been downgraded and only Apple looks robust at current levels. The majority of the large stocks we cover have lower scores than they did at the end of summer.

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Two Red Flags from China

Friday, August 21st, 2020

Cause for concern in Technology and Financials

China’s stock market is always subject to official intervention, so the signals need to be interpreted carefully. However, there are two new red flags in our equity sector model, relating to Technology and Financials. Technology has suddenly started to deteriorate, which has historically been a good lead indicator for the US Tech sector. Financials are heading for a multi-year low relative to the index, which could have important implications for China’s FX policy regime.

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