Connect with us

Markets

A rotation in equity markets starts to emerge

Published

on


“Ready for take-off” was the instant market judgment for a beleaguered airline industry on news of a breakthrough in the development of a Covid-19 vaccine.

A 15 per cent plus surge in the US shares of United Airlines, Delta Air Lines and American Airlines on Monday was bettered by British Airways parent International Airlines Group jumping 25 per cent. Ruling the sector roost for one-day price surges was Rolls-Royce, with the UK jet engine maker up 44 per cent. 

Airlines along with energy, finance, real estate, retail and hospitality are among the sectors hit hardest by Covid-19. The arrival of good news duly triggered a classic surge in their value from very cheap levels, but this week’s “vaccine pop” still leaves them trading well down on the year.

Widespread deployment of a vaccine will take time and not likely reach critical mass until mid-2021. In the interim, many countries are experiencing a rising number of infections and social restrictions heading into the northern hemisphere winter.

In market terms, near-term anxiety and additional pressure on economic activity over the coming months will compete with the natural tendency among investors to look ahead.

That will manifest itself in a debate over whether the first tangible sign of life beyond the pandemic represents a catalyst that triggers a temporary or sustained shift in global equity leadership across sectors and regions.

Bar chart of MSCI All World sector indices (% change) showing The rotation towards pandemic laggards

For investors, successful equity performance has consisted for a long time of owning popular technology names that offer growth potential and cash flow generation far ahead of the rest of the share market.

Given the dominance of tech within the US market, Wall Street has duly run up the scoreboard compared with other parts of the world where companies and sectors more exposed to the economic cycle dominate equity benchmarks.

Long-term investors have been vocal that such a sharp divergence between share market sectors and regions represented a spring waiting to snap back. That was certainly the case when news of the vaccine broke on Monday.

From here, the merits of a sustainable rotation of investor holdings of stocks and sectors depends considerably on the extent of the anticipated economic recovery next year.

Yes, a rough few months loom, but arguably 2021 looks brighter when you combine the promise of Covid-19 vaccines with the existing stimulus from governments and central banks. A vaccine on the way will help companies plan ahead, leading to greater business investment across sectors and the economy. 

Line chart of Indices in local currency, Nov 13 2019 = 100 showing Global rivals narrow some of the gap with US tech stocks

Another tailwind for cyclical stocks and sectors is that, after such a grim year, the 2021 earnings of these companies should look better by comparison. In contrast, big tech stocks have a higher bar in terms of surpassing earnings expectations after this year’s gains.

Rising long-dated government bond yields from stronger economic fundamentals will also weaken the appeal of paying a premium for growth companies and help sustain a rotation towards other areas of the equity market.

“The growth names that have carried markets to this point remain attractive on a three-year view, but now are likely to take a back seat as near-term year-over-year comparisons will be more difficult for them,” argued Stephen Auth, chief investment officer for equities at Federated Hermes.

In global terms, an economic recovery should boost the relative performance of equity markets in Europe, Japan and the UK, which are far more reliant on the performance of cyclical companies. The FTSE All World equity index, excluding the S&P 500, is back in positive territory for the year and has rallied nearly 11 per cent so far this month thanks to gains in those markets.

The UK’s FTSE 100 represents a “global cyclical bellwether”, given that almost three-quarters of the total revenue of the benchmark’s constituents is international, according to research firm TS Lombard. “With the vaccine signalling rotation into cyclicals, the UK market is set for outperformance,” it said.

However, a rotation in equity markets as the pandemic fades is likely to represent a tactical, rather than a secular, shift within equities. A more sustained move requires more growth and more inflationary pressure. Small-cap and cyclical stocks need greater pricing power that helps boost their earnings. 

That may come in time, but investors also note that over a longer period, many tech companies will retain superior earnings growth prospects. And while tech companies are sometimes disruptive forces, they also can be considered defensive investments. Strong cash flow and low debt is a hallmark of quality and this appeals during periods of market turmoil.

“Tech has such a superior growth rate, and it also has defensive qualities within a portfolio that provides diversification benefits,” observed Jim Paulsen, chief investment strategist at the Leuthold Group. “Tech will underperform, it will not crater. Over a 12 to 36 month horizon, tech looks good to me.”

michael.mackenzie@ft.com



Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

Markets

US regulators launch crackdown on Chinese listings

Published

on

By


US financial regulation updates

China-based companies will have to disclose more about their structure and contacts with the Chinese government before listing in the US, the Securities and Exchange Commission said on Friday.

Gary Gensler, the chair of the US corporate and markets regulator, has asked staff to ensure greater transparency from Chinese companies following the controversy surrounding the public offering by the Chinese ride-hailing group Didi Chuxing.

“I have asked staff to seek certain disclosures from offshore issuers associated with China-based operating companies before their registration statements will be declared effective,” Gensler said in a statement.

He added: “I believe these changes will enhance the overall quality of disclosure in registration statements of offshore issuers that have affiliations with China-based operating companies.”

The SEC’s new rules were triggered by Beijing’s announcement earlier this month that it would tighten restrictions on overseas listings, including stricter rules on what happens to the data held by those companies.

The Chinese internet regulator specifically accused Didi, which had raised $4bn with a New York flotation just days earlier, of violating personal data laws, and ordered for its app to be removed from the Chinese app store.

Beijing’s crackdown spooked US investors, sending the company’s shares tumbling almost 50 per cent in recent weeks. They have rallied slightly in the past week, however, jumping 15 per cent in the past two days based on reports that the company is considering going private again just weeks after listing.

The controversy has prompted questions over whether Didi had told investors enough either about the regulatory risks it faced in China, and specifically about its frequent contacts with Chinese regulators in the run-up to the New York offering.

Several US law firms have now filed class action lawsuits against the company on behalf of shareholders, while two members of the Senate banking committee have called for the SEC to investigate the company.

The SEC has not said whether it is undertaking an investigation or intends to do so. However, its new rules unveiled on Friday would require companies to be clearer about the way in which their offerings are structured. Many China-based companies, including Didi, avoid Chinese restrictions on foreign listings by selling their shares via an offshore shell company.

Gensler said on Friday such companies should clearly distinguish what the shell company does from what the China-based operating company does, as well as the exact financial relationship between the two.

“I worry that average investors may not realise that they hold stock in a shell company rather than a China-based operating company,” he said.

He added that companies should say whether they had received or were denied permission from Chinese authorities to list in the US, including whether any initial approval had then be rescinded.

And they will also have to spell out that they could be delisted if they do not allow the US Public Companies Accounting Oversight Board to inspect their accountants three years after listing.



Source link

Continue Reading

Markets

Wall Street stocks climb as traders look past weak growth data

Published

on

By


Equities updates

Stocks on Wall Street rose on Thursday despite weaker than expected US growth data that cemented expectations that the Federal Reserve would maintain its pandemic-era stimulus that has supported financial markets for a year and a half.

The moves followed data showing US gross domestic product grew at an annualised rate of 6.5 per cent in the second quarter, missing the 8.5 per cent rise expected by economists polled by Reuters.

The S&P 500, the blue-chip US share index, closed 0.4 per cent higher after hitting a high on Monday. The tech-heavy Nasdaq Composite index climbed 0.1 per cent, rebounding slightly after notching its worst day in two and a half months earlier in the week.

The dollar index, which measures the US currency against those of peers, fell 0.4 per cent to its weakest level since late June after the GDP numbers.

“Sentiment about the economy has become less optimistic, but that is good for equities, strangely enough,” said Nadège Dufossé, head of cross-asset strategy at fund manager Candriam. “It makes central banks less likely to withdraw support.”

Jay Powell, the Fed chair, said on Wednesday that despite “progress” towards the bank’s goals of full employment and 2 per cent average inflation, there was more “ground to cover” ahead of any tapering of its vast bond-buying programme.

“Last night’s [announcement] was pretty unambiguously hawkish,” said Blake Gwinn, rates strategist at RBC, adding that Powell’s upbeat tone on labour market figures signalled that the Fed could begin tapering its $120bn a month of debt purchases as early as the end of this year.

The yield on the 10-year US Treasury bond, which moves inversely to its price, traded flat at 1.26 per cent.

Line chart of Stoxx Europe 600 index showing European stocks close at another record high

Looking beyond the headline GDP number, some analysts said the health of the US economy was stronger than it first appeared.

Growth numbers below the surface showed that consumer spending had surged, “while the negatives in the report were from inventory drawdown, presumably from supply shortages”, said Matt Peron, director of research and portfolio manager at Janus Henderson Investors.

“This implies that the economy, and hence earnings which have also been very strong so far for Q2, will continue for some time,” he added. “The economy is back above pre-pandemic levels, and earnings are sure to follow, which should continue to support equity prices.”

Those upbeat earnings helped propel European stocks to another high on Thursday, with results from Switzerland-based chipmaker STMicroelectronics and the French manufacturer Société Bic helping lift bourses.

The region-wide Stoxx Europe 600 benchmark closed up 0.5 per cent to a new record, while London’s FTSE 100 gained 0.9 per cent and Frankfurt’s Xetra Dax ended the session 0.5 per cent higher.

In Asia, market sentiment was also boosted by a move from Chinese officials to soothe nerves over regulatory clampdowns on the nation’s tech and education sectors.

Beijing officials held a call with global investors, Wall Street banks and Chinese financial groups on Wednesday night in an attempt to calm nerves, as fears spread of a more far-reaching clampdown. Hong Kong’s Hang Seng rose 3.3 per cent on Thursday, although it was still down more than 8 per cent so far this month. The CSI 300 index of mainland Chinese stocks rose 1.9 per cent.

Brent crude, the global oil benchmark, gained 1.4 per cent to $76.09 a barrel.



Source link

Continue Reading

Markets

Man Group posts tenfold gain in performance fees

Published

on

By


Man Group PLC updates

Man Group, the world’s largest listed hedge fund manager, reported first-half performance fees 10 times higher than a year ago, in the latest sign of the industry’s robust rebound from the coronavirus pandemic.

Strong commodity and equity markets helped take performance fees at the London-based company to $284m in the six months to June, up from $29m a year before when March’s huge market falls hit many fund returns, and the highest level since at least 2015. Performance fee profits were 50 per cent above broker consensus forecasts.

Man also posted $600m of net client inflows in the three months to June, its fourth consecutive quarter of inflows, although the figure was lower than analysts had expected. However, $6bn of investment gains in the second quarter helped lift assets under management to a record high of $135.3bn.

Column chart of Half-yearly performance fees ($) showing Man Group cashes in on market rebound

Man’s results highlight how strongly the $4tn hedge fund industry has bounced back after a turbulent 18 months for markets, including a huge sell-off last spring, as well as sharp market rotations and retail investor-driven rallies in meme stocks that some funds were betting against.

Last year, hedge funds, which have long been criticised for mediocre returns and high fees, made 11.8 per cent on average, according to data group HFR, their best calendar year of gains since 2009 in the wake of the financial crisis.

Investors have taken notice. After three years of net outflows, the industry has posted $18.4bn of inflows in the first half of this year.

Chief financial officer Mark Jones said the hedge fund industry was now benefiting from a tailwind after strong gains last year. “You saw hedge funds deliver exactly what clients wanted,” he told the Financial Times.

“Clients need new sources of return,” he added. They “are trying to reduce their bond exposure, and most have as much equity exposure as they can stomach”.

This year Man has made strong gains at its computer-driven unit Man AHL, named after 1980s founders Mike Adam, David Harding and Martin Lueck, which tracks trends and other patterns in markets.

Its $4.6bn AHL Evolution fund, which bets on trends in close to 800 niche markets, has gained 10.2 per cent so far this year and contributed $129m of the performance fees in the first half. The fund is shut to new money but Jones said that late last year it opened briefly to new investment, raising $1bn in a week.

Man’s first-half profits before tax came in at $323m, well above analysts’ forecasts. The company also said it would buy back a further $100m of shares in addition to the $100m announced last September. Broker Shore Capital said the company had posted “blowout” figures.

Man’s shares rose 2.4 per cent to 196 pence, their highest level in three years.

Last month, Man announced that chief investment officer and industry veteran Sandy Rattray would leave the company. Meanwhile, Jones is set to step down from the board and take on the role of deputy chief executive, overseeing the computer-driven AHL and Numeric units.

laurence.fletcher@ft.com



Source link

Continue Reading

Trending