WHAT TO INVEST IN NEXT - Holdun


In a turnaround that seemed
unthinkable as we stockpiled toilet paper and Lysol last March, Global equity markets are now 24% above pre-pandemic levels. Such an accelerated recovery against the backdrop of a persistent global pandemic has left investors fearing limited upside from here on out.


BUSINESS AS USUAL

The three major US stock indexes head into August with impressive year-to-date gains under their belts.

The S&P clinched its sixth straight month in the green, shrugging off concerns about the latest wave
of Covid-19.

The S&P 500 jumped 2% in July and is now up over 17% YTD.

The question remains, can the growth continue?


STOCKS

Breaking news: Big tech is Big

The Stock Market continues to be supported by record-breaking earnings. At the halfway stage, S&P 500 companies have reported a 90% increase in profits from last year, making it the best earnings performance since 2009.

The mega-cap tech companies have picked up where they left off, producing mind-boggling revenue numbers over Q2. Apple, Alphabet and Microsoft all reported record quarters, with a combined profit of $57 billion, which equates to $626 million a day.

Google’s parent company, Alphabet, was particularly noteworthy, with advertising revenue up 69% year over year. YouTube alone generated $7 billion in revenue for the quarter, drawing market comparison to the $7.3 Billion in revenue reported by streaming giant, Netflix.

This Airpods revenue chart still defies belief and helps put the sheer size of these revenue-generating machines into context.

Airpod Revenue vs. Top Tech Companies (2020)

Airpod Revenue vs. Top Tech Companies (2020)

Posted by u/dremarious, ‘Airpod Revenue vs Top Tech Companies (2020)’ (Reddit, May 5, 2021) <https://www.reddit.com/r/dataisbeautiful/comments/n5m2xp/oc_airpods_revenue_vs_top_tech_companies/> accessed 9 August 2021

Takeaway: While it’s easy to look at record high numbers in the stock market and assume a bubble, record earnings figures and improving fundamentals from the biggest hitters in the index will continue to act as a support, justifying further gains.

Chinese Crackdown

In recent months, China’s equity markets have underperformed, driven, most notably, by regulatory pressure on the tech and private education sectors. The MSCI China index delivered negative returns of -14% in July, compared with a 0.7% positive return for global equities.

Panic selling gripped the Chinese market late in the month as fears over a regulatory crackdown by the Chinese government continued to mount.

Although the sell-off centred around new regulations that would force the multi-billion dollar private tutoring industry to operate as non-profit, it’s the latest example of the communist party’s unwavering ability to destroy shareholder value with an unexpected decision.

Chinas largest tech names have all recorded significant losses in recent months. Alibaba, China’s largest e-commerce company, has now seen its market cap fall by over 300 Billion dollars since its market highs set back in October.

Takeaway: While more regulation is expected, especially in socially sensitive sectors such as property and healthcare, other industries are unlikely to be affected to the same extent, creating an opportunity to cherry-pick stocks given the recent sell-off.

CRYPTO

Bitcoin Bounce

Bitcoin posted its first positive monthly gain in four months, as the cryptocurrency rallied more than 30% from $30,000 to $40,000.

J.P. Morgan’s announcement that it would make Crypto Funds available to all wealth clients for the first time coincided with aggressive buying by institutional entities according to (OTC) trading volumes data. Pushing prices higher.

All eyes will now be on the remaining big banks to see if they follow suit.

Takeaway: As the Wall Street elite continue to build out their Crypto infrastructure, Institutional investors will have the opportunity to participate in the crypto space, creating further demand.

BONDS

Inflation Effects

The yield on the 10-year Treasury fell from 1.75% to 1.18% since mid-March as concerns about runaway inflation start to roll over.

While the downward move in rates has been somewhat surprising given the economic growth and higher than expected inflation data, it suggests the market participants view the latest inflation jump as transitory. We expect to see inflation subside somewhat as supply-side contractions and stimulus effects normalize.

Takeaway: With real rates likely to stay negative for the foreseeable future, investors face wealth destruction in real terms if they continue to hold excess cash and/or traditional high-quality bonds.

THE MONTH AHEAD

In a turnaround that seemed unthinkable as we stockpiled toilet paper and Lysol last March, Global equity markets are now 24% above pre-pandemic levels. Such an accelerated recovery against the backdrop of a persistent global pandemic has left investors fearing limited upside from here on out.

Despite the faster than expected recovery, we think equity indexes can move higher, driven by a combination of robust earnings growth, attractive valuations relative to bonds, and accommodative central banks.

Everything is Relative

Many investors assess the various investment options available to them as stand-alone opportunities. In reality, most decisions in investing are relative decisions; thus, a great deal of the selection process is comparative.

In today’s market, the negative real interest rates on offer in the Fixed income market must be factored in before making any investment decision. These historically low rates are helping to moderate U.S. equity valuations, bolstering the case for owning stocks on a comparative basis.

With this in mind, we view equities as relatively more attractive, given the potential for bond yields to rise and corporate earnings to offer more positive surprises.

For fixed income, short duration, high yield bonds are still the preferred way to generate income.

No Free Lunch

While our base case scenario is broadly optimistic, the potential headwinds can’t be ignored. Most notably,

  • Depending on the length and severity of the recent Covid spike, Delta may prove another big test.
  • Year-over-year growth trends across mega-cap tech companies are likely to decelerate after peaking in Q2. Supply chain snags, less forgiving comparison figures and higher expectations will make outperformance harder in the second half of this year. As a result, equity markets will need to rely on market rotation to push stock prices higher.

As always, caution and patience are the order of the day.

HOLDUN