InvestNow News – 13th August – Pie Funds – CIO Report: Strong results from the US
Article written by Mark Devcich, Pie Funds – 9th August 2021
Chief Investment Officer Mark Devcich discusses the latest market conditions.
July was a fairly uneventful month unless you were invested in Chinese stocks! The Nasdaq Golden Dragon China index, which tracks Chinese tech stocks listed in New York, fell 22 per cent in July. Increased regulatory scrutiny and a number of left-field policy directions curtailing specific sectors like education tutoring, left investors scrambling with uncertainty as to what policy changes would be next. US markets continued to lead the world again, up over 2% whereas NZ and Australian markets were largely flat. Reporting season began in the US and results have been strong so far. But expectations have also been high, meaning large earnings beats were rewarded with far more moderate share price increases, and misses severely punished.
The most surprising progression has been the fall of the 10-year US government bond rate back down below 1.2%. For now it looks likes the 40 year bull-market in bonds persists as rates continue to fall!
Supply chains continue to be impacted and further lockdowns in Asia are pushing back lead times on securing inventory. Lockdowns have prevented the free movement of labour and efficient production of goods and services all over the world, which ultimately increases their cost of all goods and services. Combined with consumers having increased purchasing power due to more savings from lockdowns, we are seeing some of the pent-up savings now being spent aggressively and savings rates declining, which is putting pressure on prices. Inflation readings will be persistently high into next year before moderating. In the face of higher inflation and rising Delta variant Covid cases, markets have also been relatively benign with the last 5% drawdown in the S&P500 index happening over six months ago.
A lot of the heavy lifting this year has been done by the US large-cap tech stocks in the US. The large tech companies are truly phenomenal. If their growth ever slows markedly they can increase their share buybacks given their abundant cash positions, and even take on cheap debt to accelerate the pace. Apple has been a master at this, leveraging the arbitrage between corporate bond debt yields of 1% and their earnings yield of ~4%. In the quarter just been, Microsoft spent $10.4b, Google $12.8b and Apple $22.9b on share buybacks. These same three companies have added US$1.3t of market capitalisation this year which is equivalent to 10x the total capitalisation of the NZ stock market.
We have had a number of Australasian companies already update the market with their quarterly results. This year we have heard many companies may refrain from giving guidance at their results in August given lockdowns in Sydney are providing too much uncertainty.
Once again, thank you for entrusting your capital with us.
Information is current as at 31 July 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.
InvestNow News – 13th August – Pie Funds – CIO Report: Strong results from the US
Article written by Mark Devcich, Pie Funds – 9th August 2021
Chief Investment Officer Mark Devcich discusses the latest market conditions.
July was a fairly uneventful month unless you were invested in Chinese stocks! The Nasdaq Golden Dragon China index, which tracks Chinese tech stocks listed in New York, fell 22 per cent in July. Increased regulatory scrutiny and a number of left-field policy directions curtailing specific sectors like education tutoring, left investors scrambling with uncertainty as to what policy changes would be next. US markets continued to lead the world again, up over 2% whereas NZ and Australian markets were largely flat. Reporting season began in the US and results have been strong so far. But expectations have also been high, meaning large earnings beats were rewarded with far more moderate share price increases, and misses severely punished.
The most surprising progression has been the fall of the 10-year US government bond rate back down below 1.2%. For now it looks likes the 40 year bull-market in bonds persists as rates continue to fall!
Supply chains continue to be impacted and further lockdowns in Asia are pushing back lead times on securing inventory. Lockdowns have prevented the free movement of labour and efficient production of goods and services all over the world, which ultimately increases their cost of all goods and services. Combined with consumers having increased purchasing power due to more savings from lockdowns, we are seeing some of the pent-up savings now being spent aggressively and savings rates declining, which is putting pressure on prices. Inflation readings will be persistently high into next year before moderating. In the face of higher inflation and rising Delta variant Covid cases, markets have also been relatively benign with the last 5% drawdown in the S&P500 index happening over six months ago.
A lot of the heavy lifting this year has been done by the US large-cap tech stocks in the US. The large tech companies are truly phenomenal. If their growth ever slows markedly they can increase their share buybacks given their abundant cash positions, and even take on cheap debt to accelerate the pace. Apple has been a master at this, leveraging the arbitrage between corporate bond debt yields of 1% and their earnings yield of ~4%. In the quarter just been, Microsoft spent $10.4b, Google $12.8b and Apple $22.9b on share buybacks. These same three companies have added US$1.3t of market capitalisation this year which is equivalent to 10x the total capitalisation of the NZ stock market.
We have had a number of Australasian companies already update the market with their quarterly results. This year we have heard many companies may refrain from giving guidance at their results in August given lockdowns in Sydney are providing too much uncertainty.
Once again, thank you for entrusting your capital with us.
Information is current as at 31 July 2021. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a guarantee of future returns. Returns can be negative as well as positive and returns over different periods may vary.
