From Jonathan Bayes, Chief Investment Officer, Partners Wealth Group.
We have just had a rather busy and important week, and there is more to come.
Share-markets are flat to down across the globe this week, and have had a heavier burden to carry since bond-yields continue their trend higher.
For share investors, rising bond yields are the counterpoint to global economic optimism and act as a drag on valuations the higher they push.
US 10-year yields this week rose to 2.79%, which is the highest level since early 2014, and US 5-year yields are in fact at their highest rate since mid-2010, providing further confirmation of the continued interest rate re-set emerging in our new ‘post-QE’ world.
Interestingly, German 5-year yields jumped into POSITIVE territory this week too for the first time since mid-2015, but still offer investors there a paltry 0.11% in annual interest!
Driving yields higher continues to be the US Federal Reserve taper (unwind of QE) and the strong global economy.
Weekly US Consumer Confidence jumped to its highest level since 2001, manufacturing sentiment remains at or near enough to 12-year highs, and last month’s job creation looks set for a strong start to 2018.
US Earnings Season underway, and Australian Earnings Season kicks off next week
Another reason this week was big for markets was the quarterly earnings reports to come out of global tech-heavyweight’s Apple (AAPL), Amazon (AMZN), Google (GOOG), EBAY (EBAY), Facebook (FB) and Alibaba (BABA).
At this early take, results are mixed, and results are going to be absolutely key for the future performance of these market-leaders since all of these ‘growth’ stocks are a) incredibly well-owned, and b) prone to be restrained by higher bond yields given their high valuations.
I have to say, I expect many of these tech-leaders are now due a rest and will struggle in the months to come.
They have given their all, but the weight on their respective backs is now such that further gains I suspect will be hard won.
Year-to-date, GOOG is +15%, AMZN +25%, EBAY +20%, BABA +10% and FB and AAPL +2% and +5% respectively.
On results this week, EBAY and AMZN were the pick.
EBAY jumped +12% after results, buoyed by strong growth in merchant volumes and on news that it would shift its preferred payment provider from former subsidiary PayPal (PYPL) to unlisted Dutch payment group Adyen.
PYPL fell 7% on the news, but probably has further to fall given EBAY’s planned shift to Adyen by 2023.
AMZN shares jumped over +5% in after-hours trading Thursday night, fueled by strong profit growth across all divisions. AMZN’s cloud computing service saw sales jump +44% (a rising rate of growth believe it or not!), buoyed by increased internet usage and their Prime delivery business shipped over 5 billion products in 2017, which is truly staggering.
FB and AAPL numbers were more mixed.
FB figures showed a heavy reliance on Instagram for revenue growth, with daily active users on Facebook falling quarter on quarter for the first time ever in the US and Canada.
Revenue growth however was strong and FB as a group are seeking to raise the ROI for advertisers on its platforms with the hope that greater authenticity and depth of use will drive brands to spend more on marketing.
AAPL delivered record quarterly profits of US$20bln (that is 2.5x CBA’s annual profit), and did so off the back of higher-priced I-phone X sales and continued growth in services (music, App Store, movie-downloads etc).
AAPL actually sold less phones in the quarter than they did this time last year, but the profitability of the high-end I-phone X was a tail-wind.
Longer replacement cycles for key AAPL hardware will in time become an issue, but on the flipside, the growing captive AAPL eco-system on which the firm earns high margin sales (downloads etc) grows ever stronger.
Active AAPL devices (phones, tablets, watches, PC’s, set-top boxes etc) have grown +30% in the last 2 years, and AAPL service revenues grew +18% annually.
GOOG and BABA seemed to be taken the most disappointingly by investors, with GOOG in particular demonstrating that even at the top, it is being faced with very stiff competition from many of the companies I referred to above.
GOOG costs were a point of disappointment as the company was forced to pay away a greater proportion of their advertising dollars to mobile manufacturers and operators who are delivering users to the Google search engine.
The company also saw heavy investment in both its device and web-services businesses, however the latter is now developing to a scale at which it is now a valid competitor to AMZN and Microsoft (MSFT).
BABA shares fell -6% after disappointing profit figures in which the company delivered better than expected revenues (and a raised revenue guidance for the year ahead), but significantly weakened margins relative to the previous year, in large part driven by a huge jump in marketing costs.
Chinese shares fell -5% on the week, perhaps unsettled by multiple reports of increasing government oversight of both share-markets and the economy.
Fears were also elevated in Chinese junk bond markets too after a forestry issuer failed to call one of its outstanding bonds, against expectations, and again bringing concerns over repayment of corporate China’s massive debt burden to the forefront.
For now the economy is doing fine, and the strength in the US and Europe is helping drive export sales for Chinese manufacturers. However, the government is still keen to ease property excesses and to bring about an ordinarily deleveraging of its economy, so we will continue to see bouts of profit-taking particularly after such a strong share-market run.
Bitcoin now down -50% from its high
I really don’t understand Bitcoin, but then I think when I remarked on it back in early December my point was that I didn’t think many people did.
Bitcoin then duly went banzai, rising from US$12,500 to US$19,000 in the space of a few weeks, and is now back at US$8,500 as I type, proving my point. I think.
For those of you genuinely interested in Bitcoin, and interested in a contrarian perspective, I would encourage you to read a piece written by a friend of mine on linkedin.com.
It’s a terrific piece, and opened my mind to the realities of Bitcoin and blockchain technology, and is interesting not only for its seeming common-sense but because it gives a rather sensible critique of what is deemed to be the most valuable aspect of Bitcoin, being the blockchain.
Take a look here, but ignore the header please as I think Adam was deliberately poking fun.
Last but not least… results season kicks off next week
Next week we have Commonwealth Bank (CBA), National Australia Bank (NAB), Macquarie (MQG) and Rio Tinto (RIO) all reporting profit figures, and commencing what will be a 4-5 week Australian corporate results season.
Expect to see us react to results and to make portfolio change.
In fact, we are closer than ever to making some changes to our recommended Australian equity portfolios with several stocks nearing target levels on the BUY and SELL.
We were really encouraged to see UBS research released this week, which highlighted the dominance Woolworths (WOW) supermarkets are now having over their rival Coles. WOW results are not due until later in February, but investor momentum is strong enough that we hope to see the shares at our target price sooner than later.
Crown Resorts (CWN) has also had excellent share price performance, buoyed in large part I think by hopes for a special dividend or capital return at their results in a few weeks.
Having sold off incidental assets such as Las Vegas and Australian property, and their stake in online betting agent Crownbet, CWN will be net cash on its balance sheet by June and in the enviable position of being able to both fund its $1.8bn Sydney Casino project and potentially to return capital to shareholders.
Whilst it is not guaranteed, we think investors are excited at the prospect for a special dividend, and that this is driving the shares higher.
Friday 1pm values
|S&P / ASX 200||6105||+59||+1.0%|
|Property Trust Index||1347||-10||-0.7%|
Thursday closing values
|U.S. S&P 500||2819||-18||-0.6%|
Key Dates: Australian Companies
|Mon 5th February||N/A|
|Tue 6th February||
Earnings – Magellan Group (MFG), Macquarie Group (MQG)
|Wed 7th February||
Earnings – Commonwealth Bank (CBA), Carsales.com (CAR), Rio Tinto (RIO)
Div Ex-Date – Resmed (RMD)
|Thu 8th February||
Earnings – AGL Energy (AGL), AMP (AMP), National Australia Bank (NAB), Tabcorp (TAH)
|Fri 9th February||Earnings – REA Group (REA)|
For more information on the above please contact your Partners Wealth Group advisor directly or on 1800 333 143.