Connect with us

Markets

Investors seek glimmers of turnround in US third-quarter earnings

Published

on


In the midst of the coronavirus crisis, Wall Street analysts are raising their estimates going into earnings season for the first time in more than two years. But don’t break out the bubbly just yet. 

In aggregate, S&P 500 companies are projected to report a 21 per cent fall in earnings for the third quarter from the same period last year, according to data provider FactSet. 

That is an improvement from the 25.3 per cent decline that had been projected at the beginning of summer. It is also a substantial improvement from the March to June quarter, when earnings per share plunged nearly 32 per cent. However, it would still mark the second largest year-on-year decline in quarterly earnings since the end of the financial crisis.

Overly grim initial estimates are part of the reason consensus forecasts have improved, but economic data also help justify these revisions. Surveys of business owners have improved. Retail spending increased in August for the fourth consecutive month, though the pace of growth cooled. Consumer sentiment also reached its highest level in six months.

Analysts will be looking for signs in the earnings season that this data has translated into a better profit outlook to support current market valuations after a historic Wall Street recovery as coronavirus lockdowns eased and tech stocks surged.

Even after the S&P 500 slipped nearly 4 per cent in September, stocks in the index are trading on a valuation equivalent to 21.6 times forecast earnings for the next 12 months, well above the historical average of about 16. 

“To justify these valuations and support stocks, it does feel like we need to get some confirmation from this earnings season that companies are recovering along with the economy,” Jeff Kleintop, chief global investment strategist at Charles Schwab, said. 

Technology in particular will be closely watched because of the sector’s spectacular run, with market gains concentrated in a handful of big companies.

Bar chart of EPS growth (%) showing Q3 earnings for the S&P 500 are projected to decline 21%

There are some analyst concerns that tech companies may struggle to meet lofty expectations because their business, which experienced less of a hit when lockdowns were imposed than other sectors, could see growth cool as the rest of the market recovers. 

Tech companies on the S&P 500 are expected to report an earnings decline of 2.7 per cent in aggregate. If consensus predictions play out, that would make it the third-best performer of the 11 major sectors on the benchmark index. 

“They’re the masters of surprise,” said Mike Thompson of Goldman Sachs Asset Management. “I’d be surprised if they didn’t figure out how to swing that into low single-digit [growth] numbers,” he added. 

For the most part, however, third-quarter results still offer only a rear view mirror perspective. Market sentiment is more likely to be dominated by uncertainty over the US presidential election arriving midway though reporting season, how soon a coronavirus treatment is developed and the size of future fiscal stimulus.

Dwindling hopes for even a limited stimulus deal to extend earlier support have raised doubts about the near 26 per cent EPS growth that has been pencilled in for calendar year 2021.

The sheer magnitude of the initial stimulus had helped drive up household incomes and the savings rate as it eased the psychological toll for consumers who would otherwise have struggled to pay their bills.

The expiration of most previous aid programmes has left millions of Americans on edge with a wave of job cuts coming. A handful of US companies including Disney, ExxonMobil and Allstate last week announced tens of thousands of job cuts.

“The US took a big bang approach to stimulus” and that was a “big driver of the recovery”, says Dan Suzuki, deputy chief investment officer at Richard Bernstein Advisors. “It will be interesting to see how relative growth is impacted going forward if the US stimulus slows significantly more than the rest of the world . . . and whether that shows up in companies’ comments.” 

The big uncertainty for investors — how the Covid-19 pandemic evolves — also overhangs everything.

“The science of Covid is getting better, but I fear the psychology of Covid is getting worse,” said Rupal Bhansali, chief investment officer at Ariel Investments. “Unless we see a change to that psychology, people are going to be very circumspect in spending and that just has implications for the economy and corporate profits.”

Mamta.Badkar@ft.com



Source link

Markets

How traders might exploit quantum computing

Published

on

By


If you had a sports almanac from the future as did Biff Tannen, the brutish bully of the time-travelling Back to the Future movie trilogy, how might you be inclined to take advantage of the foresight buried within it?

The obvious temptation would be to place sure bets in the market that make you rich. In Biff’s case, the wealth is then used to change the world into a dystopian reality in which he himself exists as “America’s greatest living hero”.

That sort of thing used to be considered fiction. But the dawn of so-called “supremacy” of quantum computing over conventional technology raises the possibility that one day soon someone might be able to effectively see into the future.

This is because quantum computers, when they become fully capable, are likely to be uniquely good at crunching probability scenarios. They are based on the mysterious world of quantum physics. Quantum bits or qubits are the basic units of information in quantum computers. Unlike the binary bits of traditional computing, which must be either zero or one, qubits can be both at the same time.

This gives quantum computers super powers that will allow them to solve probability-based tasks that would previously have been impossibly hard for conventional counterparts in realistic timeframes. If the problem at hand was a game of football, adding quantum computers to the mix is like allowing footballers to use their hands to get the ball into the net, say quantum experts.

It’s a prospect that poses an entire new set of challenges for market regulators and participants. If super quantum computers really can help institutions see into the future, the information advantage will be unprecedented.

It might also represent an entirely new type of front-running and market manipulation risk, one that regulators can’t necessarily even identify unless they too have a quantum computer at hand.

In Back to the Future, the almanac gave Biff a 60-year insight advantage over everyone else in his home 1955 timeline. With quantum computers, the edge might only be nanoseconds. But in the fast and furious world of high-frequency trading, that could be enough to sweep up.

The reassuring news — at least for now — is that we’re still at least five years away from quantum computers being powerful enough to compete with existing supercomputers on much simpler problems. Prediction might not even be their initial forte.

Goldman Sachs research recently noted, as and when quantum computers are rolled out, they are far more likely to be deployed on crunching options pricing conundrums or running Monte Carlo simulations that value existing portfolios than they are on predicting future movements of asset classes.

According to Tristan Fletcher, of artificial intelligence-forecasting start-up ChAI, that’s because prediction is ultimately about solving a very specific, deep problem by understanding the nuances of the data that matters.

“We are already at the limits of what any system that isn’t actually listening to Opec meetings and five-year plans is capable of,” he said. It’s not the complexity of the calculation that is the issue as much as the breadth of the data sample at hand. That means prediction wouldn’t necessarily get more accurate with quantum power.

The appeal to focus on “brute-force” problems such as optimising portfolio analysis or cracking cryptographic problems such as those that underpin bitcoin, the cryptocurrency, is far greater.

But this poses its own problems. If cryptographic systems can be broken, exceptionally sensitive data held across the financial system could be exposed and taken advantage of in unfair and market manipulative ways.

Rather than being able to better predict the market, the true pay off in the arms race might lie in achieving quantum-level encryption-breaking capability and using it subtly to seize the information that can get a trader ahead. Experts say the chances someone is already up to this, however, are low. If quantum supremacy had been achieved, the news of it would leak pretty quickly.

“We don’t know what we don’t know,” said Jan Goetz, chief executive of IQM, a quantum computing builder. “But generally the community is very small so everyone knows what’s going on. The status quo is clear.”

Nonetheless, the financial sector seems to be waking up to this quantum computing issue. Many banks and institutions are introducing teams to think exclusively about how quantum computing will affect their business. How far ahead they are on making their systems quantum secure is harder to say. It’s a secretive issue. For now, most agree, the threat level is low, not least because — as the hacking of the Colonial pipeline shows — system security is low enough to ensure far cheaper and simpler ways to hijack digital systems.

izabella.kaminska@ft.com



Source link

Continue Reading

Markets

Martin Gilbert returns to dealmaking fray with Saracen acquisition

Published

on

By


Martin Gilbert, the acquisitive founder of Aberdeen Asset Management, has returned to the dealmaking fray and scooped up Edinburgh-based boutique Saracen Fund Managers through his new venture. 

AssetCo, the Aim-listed company of which Gilbert became chair in April, said on Friday it had agreed to buy Saracen for £2.75m. The deal marks the first step in its strategy to use its platform to make acquisitions in the asset and wealth management industries.

“We need to acquire a regulated entity,” said Gilbert, who established Aberdeen four decades ago and helped orchestrate the £11bn all-share merger between Standard Life Investments and Aberdeen Asset Management in 2017. “Saracen was typical of a good asset manager that had struggled to grow. That’s where we think we can help.” 

Saracen was founded in the late 1990s and has five full-time employees and three funds, which together manage about £120m in assets. In the financial year ended March 31, the group recorded turnover of £985,364 and a post-tax loss of £15,146.

David McCann, an analyst at Numis Securities, described Saracen as “a nice little business but obviously it’s very small”. He added: “It doesn’t move the needle for AssetCo, but it’s about what they do next. The expectation is that this is used as a building block for something much bigger.” 

Dealmaking is sweeping across the fragmented asset management industry. Gilbert, who stepped down from the board of Standard Life Aberdeen in December 2019 and is also chair of fintech Revolut, said AssetCo was “pretty ambitious, we’re looking at lots of opportunities”. 

“There are lots of opportunities for consolidation at all levels because of headwinds like the move to passive, fee compression, ESG and the move from public to private markets.

“We grew Aberdeen largely by organic growth and acquisitions,” he added. “That is our current strategy but at the boutique end of the market. I’ve told [Standard Life Aberdeen chief executive] Steve Bird ‘you’ve nothing to fear from us’.” 

AssetCo also owns a small stake in UK investment group River and Mercantile. Gilbert and Peter McKellar, who is also a director of AssetCo, will join the board of Saracen once the deal is completed.

Standard Life Aberdeen’s share price has tumbled about a third since the merger was struck.

The group last month cut its dividend by a third after full-year pre-tax profit fell almost 17 per cent and investors yanked money from its funds. It was also widely mocked online after announcing it would change its name to Abrdn.

Gilbert said: “The merger was obviously going to be difficult but the business is not alone in having to look at overheads because of the headwinds the industry is facing. It has the strongest balance sheet in the sector.” 

He added he was “supportive” of the rebrand: “That’s me being diplomatic.”



Source link

Continue Reading

Markets

Wall Street stocks bounce back after inflation scare

Published

on

By


Wall Street stocks went into recovery mode on Thursday, after being pushed lower for three consecutive sessions by fears that central banks will withdraw crisis-era support following a surge in inflation.

The S&P 500 index was up 1 per cent at lunchtime in New York, after falling 2.1 per cent on Wednesday in its worst one-day performance since February. The technology-focused Nasdaq Composite rose 0.6 per cent, having neared correction territory on Wednesday when it closed almost 8 per cent below its record high in April.

US government debt rallied, with the yield on the benchmark 10-year Treasury sliding 0.03 percentage points to 1.67 per cent.

The S&P 500 hit an all-time high on Friday, fuelled by optimism about a global recovery supported by central banks keeping monetary policies loose. The blue-chip benchmark then lost 4 per cent over three sessions as worries about inflation rippled through markets.

Data released on Wednesday showed US inflation rose 4.2 per cent year on year in April, with prices rising at a faster pace than economists had forecast. This increased speculation about the Federal Reserve reducing its $120bn of monthly bond purchases has helped lower borrowing costs and prop up equity valuations.

Fed vice-chair Richard Clarida said this week, however, that “transitory” factors related to industry shutdowns last year had pushed price rises above the central bank’s 2 per cent target but the economy remained “a long way from our goals”.

Analysts warned that market volatility would continue as investors swung from believing the Fed to fretting that its policymakers would act too late to combat inflation and then tighten financial conditions rapidly.

Line chart of S&P 500 index showing Wall Street benchmark on track to snap three-session losing streak

“We are at such an inflection point that volatility in markets is likely to be quite persistent,” said Sonja Laud, chief investment officer at Legal & General Investment Management. “Any chance of a change from the story of constantly low interest rates is going to be unsettling.”

The Vix, an index of expected volatility on the S&P 500 known as Wall Street’s “fear gauge”, is running at around its highest level since early March.

“Markets are volatile because they’re not sure which sort of inflation we have at present, or what, if anything, the Federal Reserve may do to bring inflation down,” said Nicholas Colas of research house DataTrek.

Mark Haefele, chief investment officer at UBS wealth management, said the market jitters also presented an opening for traders.

“Given our view that the spike in inflation will prove transitory, and that the equity rally has further to run, investors can use elevated volatility to build long-term exposure,” he said.

In Europe, the Stoxx 600 index ended the session 0.1 per cent lower, paring a loss of 1.7 per cent earlier in the session.

International oil benchmark Brent crude dropped 3.8 per cent to $66.68 a barrel as the Colonial pipeline in the US resumed operations after being shut down last Friday by a cyber attack.

The dollar index, which measures the greenback against major currencies, rose 0.1 per cent.



Source link

Continue Reading

Trending