22nd Jul '23 by Edmund Shing

11 comments 2808 reads

Market Musings 220723
Time to take profit on US Tech?

Disappointing results from FAANG stocks could prompt Tech profit-taking

Summary

High Net Worth: Surprisingly Prudent
Still a good time to invest in Banks?
Time to Take Profits in Tech?
Rotate out of Technology Into Banks?
Banks could prompt a Euro STOXX 50 breakout
Bonus Podcast recommendation

Podcast
Stock Market Seasons in the sun (5 mins)

Definition of seasonality
Reasons for patterns
“Sell in May and Go Away” explained
Which assets should investors play over the summer months?

High Net Worth: Surprisingly Prudent

Due in no small measure to the poor performance of global stocks and bonds over most of last year (until October), note how High Net Worth Individuals around the world have retreated to holding more cash than at any point in the last 20+ years, according to the Capgemini World Wealth Report 2023.

High Net Worth: 34% on average of net worth held in cash at end-2022

Source: Capgemini

This suggests that many wealthy investors have thus missed out on much of the recovery in global stocks since October last year…

Of course, it is not all that bad, given that cash can attract an interest rate of as high as 5% in the US (from money market funds), and even just over 5% in the UK (on 90-day notice accounts). These rates are much higher than at any point in the last 15 years, so holding so much cash is not as irrational as one might think.

That being said, note how banks are making more money than for many years off the back of the gap between average interest rates on loans and on deposits (the so-called “net interest margin”). This is largely because individuals are lazier than economists assume, and do not rush to move their money to the best available savings interest rate.

Still a good time to invest in Banks?

In principle, a higher net interest margin on tha back of repricing interest rates on loans faster than for deposits is good news for bank profitability. However, this needs to be set against the risk of higher bad debts and shrinking of loan books as a potential economic…

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William K

22nd Jul '23

Thanks Edmund. Very helpful insights. Is it time to take profits in tech? Anyone's guess! The Nasdaq100 rally this year has defied all expectations (and gravity) - perhaps irrational exuberance. It must be due for a 5-10% correction over the next couple of months. If it falls another 2% (say 300 points) this week I'll start reducing my positions. But I'm still not ruling out an all time high for the index over the next 6 months.

The Phoenix

Hi Edmund I have been reading a lot of articles saying money been flooding out of small/medium US banks into money market funds and said banks are having to borrow from the Fed at high interest rates to stay afloat, but the lending rate is eroding their margin so although solvent it will destroy profitability.

LeicesterPete

Thanks again for another great summary. Interesting to see the resistance level the FAANG stocks have reached. I'm hoping this is another sign to support the recent position I've opened on the short ETP WisdomTree Multi Asset Issuer (LON:QQQS) ...note this is risky as its 3x short etp and also carries fx risk, but its one I'm comfortable with and see it as a hedge to my overall portfolio.

My only concern is the Nasdaq100 rebalancing on Monday and how this may impact the index either negatively or positively. Bloomberg commentator suggests no impact either way, but interested in any other views.

bullhead

23rd Jul '23

Personally after having been through various booms and busts in tech since the tech/dot com boom of the late 90s have found trying to time tech markets a fools errand and the best option seems to be pound cost averaging in investments trusts or private equity trusts invested in this area I list a few below who all have good long term returns you will have periods of low returns and falls but patience is a virtue that has paid off handsomely

Allianz Technology Trust (LON:ATT)

Polar Capital Technology Trust (LON:PCT)

HgCapital Trust (LON:HGT)

Depends on your time scale but over long term the record shows tech has been the future

mojomogoz

I don’t know the instrument but if 3x levered the time decay on it will be large and holding beyond very short term (ie intra day!) very expensive.

BnB

Very good advice. If the index just consolidates sideways, this instrument will likely lose money if held over periods of more than one day. Though we are probably due a correction, I’d be careful with position size. My efforts to short the indices by selling futures almost always end with egg on my face.

The US on cap weighted basis is undoubtedly expensive. When and how it changes is hard to know. My guess is it will happen over extended period of time (more going nowhere for years rather than flashy down move) simply as I believe the market and economic drama is likely behind us and the US and world is in a nascent expansion phase…a new era of you will…we have them all the time but we don’t have labels for them or confidence in them until they have been around for good few years (look at 2009/10 onwards, the ‘era’ started then for sure but we didn’t have a label or consensus it was durable or post crisis until 2013 earliest imo, and probably more like 2015ish and even later)

So, my guess is that the US will be a beautiful market for spread or alpha - long and short. I expect it to have fairly massive dispersion. Whereas, RoW on average I see as ‘beta’ or directional play. Mainly long developed markets (…they tend to not roll over and die as countries despite the gloomy narratives around some, mainly Europe and U.K.) and that bias too for emerging markets but they are always much more idiosyncratic in the risk they present (absent late stage global bull markets)

Who knows re next few months? The up impulse in nasdaq is so strong that gravity usually weighs. But this will be counterweighted by ‘endogenous liquidity’ dynamics more generally beginning to fire up again as we endure into our new economic and so market era.

In addition, the chances of an immaculate disinflation continuing are much higher than is believed. China is unlikely to find the mojo of the past 3+ decades. It has a massive excess of infrastructure and productive capacity relative to its domestic needs (absent a consumption revolution...unlikely without a political revolution!) and so its probably an exporter of deflation to the world for a long time to come. Chinese companies will use price as a way to retain market share and the govt will be supportive as it will want the foreign income to help manage the balance sheet recession the country will undergo (a la Japan post 1989).

Doubly in addition, pressure from commodities markets is likely to be more of the cyclical than structural nature linked to China issues. There is a dominant narrative of undersupply. My two reasons for why this is wrong so cyclical dominates structural are:

1) people underestimate/forget just how much China was the driver of a demand shock in the last 20yrs, aided massively for a period by an EM boom c.2004-10, and this is no longer in play. Yes DMs will invest more in infrastructure and domestic production (though less of that than narratives claim) but this is not of the need (originally anyway before a 'bubble' took hold), scale or pace of the China and shorter EM echo boom demands

2) Net zero, EVs, green energy (apart from nuke depending if you classify that green or not) if a fail. We want it to be but the technology and cost is not up to delivering what the world wants. There is no way that the world moves its vehicle use to EV such that battery metals explode. Ergo the whole net zero/green commodity complex will suffer from excess not under investment.

mojovision out

Haha. I have given up on the emotional comfort or occasional ego high of shorting the market for hedging purposes brings. I know from experience my ability to profit from shorting at a macro (rather than micro ie stock) level is restricted to periods of wild emotions in markets and I can fade those swings.

I take my lumps and if I'm smart enough may disinvest a bit before they come. That said, I'm sceptical of much market timing ability and view with caution the many claims here and elsewhere that people have timed their overall allocation away and into market

Harry Hindsight

Re Banks - I'm caught in a variable rate mortgage (two actually from a buy-to-let) and get a letter almost weekly on rate rises. I suspect savers are not receiving such prompt attention (not a scandal as I should not be a blood sucking landlord, so suck it up).

Georgia Capital (LON:CGEO) is flying, Standard Chartered (LON:STAN) on the move and others.

Trouble is one bad news day and it all comes crashing down, (China was saving the world back in January).

batt

24th Jul '23

Thanks Edmund. Inciteful as always.

If High Net Worth individuals have a lot of cash, at least some of that money will be invested at some stage.

If the UK Banks are too successful, could they attract a windfall tax?

MontanaDawn

I like that..."tech has been the future"...nice one.

Market Musings 220723 Time to take profit on US Tech?

Market Musings 220723
Time to take profit on US Tech?

Summary

Podcast
Stock Market Seasons in the sun (5 mins)

High Net Worth: Surprisingly Prudent

Still a good time to invest in Banks?

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

11 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 220723 Time to take profit on US Tech?

Market Musings 220723Time to take profit on US Tech?

Summary

PodcastStock Market Seasons in the sun (5 mins)

High Net Worth: Surprisingly Prudent

Still a good time to invest in Banks?

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

11 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 220723
Time to take profit on US Tech?

Podcast
Stock Market Seasons in the sun (5 mins)