The Three Ts of Trading...
Technology stocks particularly the “FAANG” (Facebook, Apple, Amazon, Netflix and Google) variety have been on sale recently. Market leaders in 2017, the sector has been hit hard by Facebook’s data woes and the possibility of increased scrutiny and regulation by government agencies.
At almost 25% of the S&P 500 and containing some of America’s most dominant companies, it’s not a sector any investor can ignore and if the broader market is to recover it needs leadership from this group.
What about Facebook?
My sense is that Facebook may have to undergo scrutiny from regulators on political ads not unlike the rules that traditional advertising channels have to follow. The company also has to regain the trust of its users relative to personal data.
This is doable although rejigging the news feed and relationships with advertisers may impact margins going forward. Most likely near-term volatility will persist (mixed user metrics, regulatory headlines, etc.), however, for long-term minded investors we believe this represents an opportunity.
Facebook’s two “other” growth engines WhatsApp and Instagram are still intact and doing well I might add. A good 1Q 2018 earnings report could well lay many of these fears to rest.
That said, at US$155.00 FB is trading at 15.1 X 2019 EPS. Cheap relative to its EPS growth rate of 20% plus. So, investors need to keep an eye on this very important industry group.
When you look at some of the most powerful themes that will continue to affect our personal lives and the economy into the future i.e. self-driving cars, social media, 5G, internet of things, electric vehicles, and artificial intelligence (AI), you realise that they are ALL enabled by technology and especially by many of the companies that have been sold off in the recent tech rout-Amazon, Google, Microsoft, Tencent, Alibaba, Qualcomm, Nvidia, Intel, Tesla etc.
Tech companies report earnings over the next 30 days. Most analysts expect another “blowout” quarter from the group. If so that could stabilize entire sector and the market.
A Trade War?
The Trump administration imposition of tariffs, first on steel and aluminium imports and soon on some 50 billion USD of goods that China exports to the U.S (roughly 10% of the total-not that much), has forced Wall Street to contemplate the unthinkable: a trade war that slows global economic growth.
Worries about protectionism in other economies have also pressured equity markets in recent weeks. Citibank economists estimate that if an all- out global trade war eventuates it could shave some 1-1.5% off world GDP annually.
What to look at
So, in 2018 this is an area that needs to be closely watched. How? Well start by ignoring the strident headlines in the financial media and the talking heads on CNBC. Instead, pay attention to what companies are doing and saying in earnings reports since they are at the “coal face” so to speak. That’s where the negatives (and positives) of trade policy will first surface.
In terms of the economic effects they will be gradual and will differ by country and region. Given the number of players and the scale of global trade not to mention the exemptions given and ongoing negotiations it is almost impossible to quantify the immediate macroeconomic consequences.
To be fair, China is hardly an innocent victim here. For years China has pursued innumerable blatantly protectionist policies towards overseas companies. It’s no wonder that Facebook and Alphabet don’t do a lot of business in China.
In order to operate in China international companies must find a local partner. Tesla has struggled to find a suitable candidate in spite of demand for its cars. China has responded with $50B of reciprocal tariffs targeting key U.S industries such as soybeans, automobiles, chemicals and aircraft. However, neither side planning to implement the tariffs right away.
In addition, White House officials downplayed economic impact and reiterated room for negotiations (as did their Chinese counterparts). Both have left time to negotiate before implementing tariffs.
At this point mostly “headline risk” and more market volatility but probably not enough to totally overcome the underlying positive economic and earnings fundamentals in 2018. Both sides are “posturing” in my view.
Responsible for a number of the positive factors that drove equity markets higher in 2017, tax reform, a massive roll back of regulations, and a large infrastructure spend, President Trump’s most recent endeavours have pressured equity markets.
I’ve been investing in global equity markets for over 30 years and normally it has paid to ignore headlines out of Washington DC. A line from Shakespeare’s Macbeth has always come to mind “Tis a tale told by an idiot, full of sound and fury and signifying nothing”.
This time however we have a President who tweets incessantly, targets companies (Amazon), countries, individuals – you name it. So how much attention should investors give this very vocal public figure?
U.S Tax reforms
Well, I’ll give him credit for tax reform (I suspect it will be his greatest legacy) and it’s very likely that the impact of lower corporate and individual tax rates will underpin corporate growth for a significant period.
We have only had one quarter of company earnings releases (Q4 2017), but analysts have already hiked earnings estimates as companies provide mostly bullish guidance for 2018 based on the new tax regime. I suspect this will be ongoing and will serve to underpin markets going forward.
Investing in the “age of Trump”
Investing in the “age of Trump” is not always easy. Be prepared for criticism and negative commentary about stocks or sectors that you hold. The fact is that most will recover as investors concentrate on the underlying fundamentals.
Amazon is a good example. Trump recently tweeted about Amazon costing the U.S. post office billions “for being their Delivery Boy” and being a “no-tax monopoly”!
Truth is package delivery is a highly profitable business for the U.S. post office. It’s losing money due to huge pension liabilities. Amazon pays tax like any other U.S. domiciled corporation (effective tax rate was 40% in 2017) Sales taxes for on line transactions are a state matter and if broadly imposed are unlikely to dent Amazon’s appeal.
Amazon represents less than 10% of U.S. retail sales- hardly a monopoly. (As of 5/04/2018 Amazon stock is still up 20% YTD.)
Watch what Trump “does” not what he says (and he’ll say a lot).
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