• Harsh Patel, CFA

Beneath The Surface - Vol. 2



Global stock markets had a pretty spectacular April considering we are at the beginning of what looks like a fairly heavy global recession. Here are the global stock index performance numbers for the past month: 

  • US / S&P500: +13%

  • EU / EUROSTOXX: +9%

  • UK / FTSE100: +6%

  • Hong Kong / HANG SENG: +6%

There's a tug-of-war at play right now. It's economic data - which paints a pessimistic picture of the future - versus governments and central banks who have spent most of April throwing the kitchen sink - and then some - at COVID-19. 


For the time being, it looks like investors and stock markets are taking an optimistic view of what lies ahead, with talk of treatments being readiedvaccines being trialled and lockdowns being gradually lifted helping improve sentiment. 


If we look at what's driving US stock market outperformance versus the major European / Asian stock markets, one theme we've covered previously becomes apparent fairly quickly: it's the digital economy. 


Roughly 25% of the S&P500 is made up of tech companies, with 5 juggernauts making up 20% of the entire S&P500 index: Microsoft, Apple, Amazon, Facebook & Alphabet. These 5 names have performed very well over the past month, helping drive US outperformance versus European and Asian stock market indices. 


It's earnings season right and the tech giants have reported their Q1 earnings this past week - we want to spent some time looking at the key takeaways from these events to get a sense of what might happen going forward.


Tech earnings takeaways

  • Having a real-world footprint is proving to be costly

  • It seems as though the more "digital" you are, the more insulated you are from this recession. Facebook, Microsoft & Alphabet - all of whom derive most of their earnings from software - outperformed earnings expectations and saw a corresponding boost to their respective share prices this week. On the other hand, Apple & Amazon were impacted by real world issues such as supply chain disruptions, store closures and increased costs thanks to their larger real-world footprints. Amazon did post impressive revenue, subscriber and AWS growth, but fell short of earnings expectations due to the increased costs of moving goods around and lower margins (they sold more groceries and need-to-haves which typically have lower margins than the nice-to-have goods which they typically sell when we aren't in the midst of a lockdown and recession).


  • Digital advertising revenue remains robust

  • There were some fears that the slowdown in activity would impact marketing budgets and lead to a corresponding decline in revenue for Facebook and Alphabet - both of whom rely heavily on digital advertising revenues. Instead, what seems to be happening is that companies are spending less on the lavish TV / magazine / traditional advertising campaigns and switching to pay-per-click means of building brand awareness and generating quick sales. There has been lower spending from smaller businesses for whom digital marketing was the only form of paid marketing, but this has been offset by increased spending from the "stay-at-home winners" which include e-commerce and gaming companies. 


Tech - looking ahead


The earnings posted this past week covered financial performance for Q1 - until the end of March. And that's important. The real impact of the COVID-19 related lockdown and economic downturn only started kicking in towards the end of March. 


The Q2 earnings season in July / August will be much more brutal as a result - Apple withdrew guidance for the rest of the year due to the uncertainty which lies ahead while Amazon warned investors that increased costs might drive them into the red over the course of Q2. In other words, expect a bumpy road as far as earnings from these 2 giants are concerned for the rest of this year. 


While all 5 of the above-mentioned tech juggernauts are likely winners over the long run thanks to their strong financial positions and good potential for continued growth, the recent stock rally makes us feel like there may be other investment opportunities out there which could offer a better risk / reward trade-off. 


What else is out there?


As we advocated right at the start of the downturn - we still think it makes a lot of sense to look for companies with strong balance sheets (read: low debt and healthy cash balances), predictable cash flows and strong market share / brand awareness. These are the companies which will be best positioned to expand their market share coming out of this recession either via industry consolidation (i.e. buying up their competitors) or customer acquisition (i.e. being the best brand for customers). The tech names covered above have all these characteristics and can offer strong growth on top. 


But we think there are other names out there in the European and Asian markets which are also financially sound and can offer good growth potential either via growing their share of the pie (consumer staples giants and pharmaceutical giants for example), or being positioned in a part of the global economy where the whole pie is growing (software companies, robotics companies and e-commerce names for example).


In summary, while we'll have to leave it down to you when it comes to picking out the individual names, we would recommend asking yourself, as discussed above, whether the stock(s) you are looking at investing in for the long term are well positioned to either grow their share of the pie, grow the overall pie, or both. 


The Macro Perspective


In addition to a busy week for company earnings, it was also a heavy week of economic data releases. As usual, here's the latest:

  • Eurozone unemployment rate stands at 7.4% and likely to grow further next month.

  • US Jobless Claims: 3.8 million new claims, with the total now approaching 30 million. A major flashpoint will be the monthly US employment report, due next Friday.

  • US Q1 GDP shrunk 4.8% in Q1 versus expectations of a 4.0% decline.

Elsewhere, the US Federal Reserve and the European Central Bank both had their latest monetary policy decisions this week, with both keeping interest rates unchanged.

  • The US Fed has been proactive throughout this crisis, expanding its $600bn lending programme to larger and riskier companies as part of its latest set of announced measures in order to help soften the COVID-19 blow.

  • The ECB has also increased its level of proactivity, announcing its push to lend to the region's banks at ultra low rates in order to make that money more accessible for businesses and consumers across the Eurozone. It's measures have so far been far less intensive than those of the US Fed. While this has left financial markets wanting more from the ECB, President Christine Lagarde has again been vocal about the need for more support from European government. We agree - this type of crisis also needs strong fiscal interventions of the kind we’ve seen in the US & UK, and the EU is handicapping itself by struggling to build on that initial €500bn spending announcement.


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Disclaimer: At Evarvest we believe in making investing and investment education more accessible, but we don’t provide investment advice and individual investors should make their own decisions. While we try our best, we cannot ensure the accuracy of the information we provide.


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Please know, the value of investments can go up as well as down and you may receive back less than your original investment. Further, the tax on your investments depends on your individual circumstances and may be subject to change.  

Evarvest Limited refers to the Evarvest network and / or one or more of its subsidiaries, each of which is a separate legal entity.