FEBRUARY 2021 MARKET UPDATE
Global stock markets have mostly held onto the gains made following the strong performance since November 2020 although there are changes happening beneath the surface that are interesting. Firstly, there has been a pronounced rotation within global equity equity markets – that is certain sectors or themes doing badly and others doing better with an aggregate neutral outcome for the benchmark (the S&P500 for example). For many years the technology sector leaders in the US have been responsible for a significant proportion of the growth in US stock markets. Companies like Alphabet (Google), Microsoft, Facebook, Netflix, Amazon, Apple and latterly Tesla and Zoom have seen steep rises in their share prices. This was amplified by the lockdowns that characterised the last year as we all transitioned to a more tech oriented lifestyle (working from home, shopping online, consuming more digital content etc.).
To some extent, the sharp rises in technology company stocks was justified. Many people will have become familiar with using Zoom for the first time during lockdown and it is not hard to see the linkage between the lockdown and rising revenues at the company. However, the share price rising from $122 in April 2020 to a peak of $568 is…ambitious to say the least. At the peak share price the company was worth $165bn, but its revenue in 2021 is likely to be $2.6bn, and is only forecast to rise to $3.5bn in 2022. Paying 60x revenues for any established business is folly and the rate of growth in no way justifies the valuation. In addition it is not as if Zoom has no competition or that its customers have high switching costs. Also how much more zooming is it possible for the world to do?!
Similar stretching valuations were evident from many of the technology companies that had been pulling stock markets forward, but over the last two months their leadership has lagged. Their share prices have deflated (Zoom for example is now valued at $394 per share – still too high but moving in the right direction) and the market leadership has rotated towards those companies that have previously been laggards. The reason for the rotation has been the vaccine roll-out and the growing promise that lockdown ending, freedoms returning and economic recovery are coming. As such, those companies most distressed by lockdown (basically any business that relies on people moving, enjoying themselves and congregating) have risen strongly with investors imagining their trading recovery. We have also seen rising commodity prices fuelled by oil pushing through $60pb and rising demand for commodities driven by Chinese economic recovery.
The vaccine roll-out has been, in a global view, mostly impressive and the evidence of the efficacy of the vaccines is mounting. It does look that we will soon be rid of this blight, at least until the next variation comes along, which of course it must. Quite what lessons will be drawn about the various governmental responses to the pandemic is for another day, but the ending of lockdown will reveal for the first time the extent of the damage done to sectors of the economy. Our view is that in hospitality and other areas, it will have bitten deep and taken hold. For thousands of businesses the end of lockdown and the various government support schemes will see them collapse into administration. However, even if we will take many years to reclaim the GDP levels before lockdown investors are, rightly, focusing on the strong recovery and economic growth that will come from the easing. As such we expect this market rotation trend to persist in the coming months and we are positioning the models accordingly.
