3 Minute Market Update 21st February 2021
Rates expectations up, tech down, value flat
Commodities keep going
Credit spreads remain ‘on the tights’
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The Week That Was
Another week, another economic scenario in microcosm. As confidence in the recovery grew so did rate expectations and, in this scenario what is good for the economy might not be so great for stocks, especially those that are relatively expensive and have ‘long duration cash flows’. The greater the proportion of a stocks value that is attributable to cash flows expected to occur far in the future the more sensitive they will be to changes in long-term interests rates (which are used to discount the present value of those cash flows.
Rates have been steadily inching up all year without rate sensitive stocks really being affected but as they got nearer to 1.5% the boiling frog finally started to feel the heat. That meant that while markets overall were flat, value stocks (cyclical, industrial stocks and also banks ) were up by around 1% and growth stocks lost a similar amount. At a global sector level financials and energy led the way (up 2 and 3% respectively) while utilities, information technology and health care stocks fell the most (all down by around 2%). Within tech, Google was one of the more resilient stocks while Facebook was down 5%. The Australian revenue of these giants probably doesn’t move the dial on their overall value but there is a sense around the world that Facebook (unlike Google) may have misjudged its spat with Australian regulators as other countries line-up behind Australia to impose regulatory and financial constraints.
Similarly in Australia utilities, real estate and IT (Afterpay) were down by 4%, 3% and 2% respectively while materials were up 1% and and banks held their ground. Given the relative importance of these sectors in Australia that meant the market remained flat for the week. Consumer staples were also down largely due to Coles, which beat earnings expectations but still fell 10% as the companies’ forward guidance underlined the fact that it might not be possible for a food retailer to grow earnings at quite the same clip that it did during COVID lock-down. That suddenly makes the 20 times price/earnings multiple it trades on look quite expensive. At the other end of the spectrum Treasury Wine, whose earnings were decimated by worsening Sino-Australian trade tensions in 2020, jumped 20% when it reported that sales in Europe were taking up some of the slack from weak Chinese sales. Taken together this is another anecdote that points to how the post-COVID rotation within markets could play out.
Government bond prices continued to decline across regions and countries but credit spreads around the world were stable and, if anything firmed a little. Commodities meanwhile continued to March ever higher. The power outages in Texas will have done nothing to halt the rise of oil and natural gas prices but if anything industrial metals (including iron ore) and soft commodities were even stronger.
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