Markets Weekly podcast - 22 March 2021
The boom of big tech has led to expensive public market valuations and increased regulatory scrutiny. Are private markets the answer? In this week’s Markets Weekly podcast, our host Henk Potts, Market Strategist for EMEA, is joined by Jai Lakhani, Investment Strategist, both from Barclays Private Bank. They analyse the tech sector and its prospects for investors.
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Henk Potts (HP): Hello, its Monday the 22nd of March and welcome to the Barclays Private Bank Markets Weekly podcast, the recording that will guide you through the turmoil of the global economy and financial markets.
My name is Henk Potts, Market Strategist with Barclays Private Bank. Each week I'll be joined by guests to discuss both risks and opportunities for investors.
Firstly, I’ll analyse the events that moved the markets and grabbed the headlines over the course of the past week. I’ll then analyse the outlook for the technology sector through the lens of private markets.
And finally, I’ll conclude by previewing the major events and data releases that are likely to shape the week ahead.
Certainly plenty for investors to digest during the course of last week. A slew of central bank meetings, ongoing volatility in bond markets, further disruption to Europe’s lacklustre vaccination programme.
The rally in equity markets paused as bond yields continued to rise - this after the Fed appeared content to allow the economy to run hot from an inflation perspective, I will come on to more of that shortly.
10-year Treasury yield climbed to 1.75% for the first time since January 2020, the 30-year breached 2.5% for the first time since August 2019. In terms of equity markets, the S&P 500 was down 0.8% over the course of trading week although it's still up 4.2% this quarter.
In Europe the Stoxx 600 was flat and is up 6.1% this quarter. Oil generated its biggest weekly loss since October, ending the week down almost 7%. Brent trading around $62 a barrel, this after US crude stockpiles rose above the half a billion mark.
The International Energy Agency said global supplies are plentiful and signs China may restrict the importation of heavy emissions fuel. Lower prices for energy, of course, could be positive for overall sentiment – could take some of the pressure out of the inflation projections.
The real action at the start of this week has been in Turkey. The Lira there has been under pressure, down around about 8.5% against the dollar, in fact has been down around about 15% during the course of the trading session.
Stocks have slumped as well, down more than 6%, circuit breakers coming into force. This after President Erdogan fired the central bank governor after just four months in the job after he hiked rates last week.
He looks set to be replaced by a banking professor who has argued for lower interest rates, adding to concerns over the policy outlook and the independence of the central bank.
In Europe, the vaccination programme descended into farce last week. This after Germany and France joined other nations and suspended administering AstraZeneca’s vaccine amid concern over blood clotting.
The decision delivered yet another blow to Europe's inoculation programme which has been blighted by political indecision, supply disruptions, and public scepticism. In terms of advice, the European Medicines Agency maintained its view that the vaccine benefits outweigh the risk.
The EU warned member states delays would result in prolonged lockdowns. Some countries as we know have restarted vaccinations. The big question is how much damage has been done.
The debacle has delayed the roll out of the inoculation programme, will likely result in higher levels of vaccine hesitancy, infringe upon the time to get to herd immunity thereby reducing both the speed and the intensity of the recovery across the bloc.
Federal Reserve meeting, as we know, was one of the most anticipated for a long time with the central bank forced to perform a balancing act of upgrading growth and inflation projections while not spooking investors about the prospect of enforced rate hikes.
In terms of forecasts, substantial upward revision to its growth forecasts driven by two large federal aid packages and of course the improving health situation. Also driving growth forecasts are expectations consumers may spend some of the excess savings built up during the course of the pandemic.
The Fed now sees GDP growth of 6.5% this year, 3.3% in 2022 and 2.2% in 2023. In terms of employment, it says stronger growth and reopening of economies will translate into a more rapid decline in unemployment.
The median projection for US unemployment rate: falling to 4.5% at the end of this year, 3.9% at the end of 2022. In terms of the all-important inflation picture, they are acknowledging firmer inflationary pressures, so core PCE forecast was revised sharply higher to 2.4% this year, 2% in 2022, although we should remember the Fed's new framework offers greater flexibility for overshooting the target.
In terms of policy, the median committee member sees a zero fed fund rate as appropriate past the end of 2023, refuting market expectations of an early lift off in late 2022. The committee believes labour market slack is elevated, when you look at that it makes sense, there's 9.5 million fewer Americans have jobs today compared to a year ago, participation rate is very low, the near term rise in inflation is seen as transitory.
In terms of the outlook, the Fed is going to watch prints, we think, not forecasts. They won't be swayed into early action by bond yield spikes. Our expectations, well, rates on hold into 2023.
The speed of the recovery allows the anticipated tapering of asset purchases at the beginning of next year but only likely to occur in a targeted and controlled way to avoid any tantrums playing out.
For the Bank of England, well they also kept rates at a record low of 0.1%, they left the size of the asset purchases at £895 billion, but did offer a more upbeat outlook for the UK economy.
Current state of the economy, they said activity in January fell less than expected, signs of consumer demand is re-emerging seeing strong sales of sports and leisure goods along with outdoor furniture, they’re not seeing a sustained rise in inflation.
For the UK economy in the short term, of course, continues to be weighed down by the third lockdown. Brexit is having an effect, there is friction at the borders that's impacting exports and imports.
Unemployment has been picking up. The positives that you can point to, we've been alluding to this over the course of the past few weeks.
UK government has been successfully rolling out its vaccination programme, the Chancellor has delivered a more supportive budget than anticipated, both of which should support household spending helping to propel growth to 4.9% during the course of this year.
In terms of the policy outlook, we think given the vast areas of uncertainty the MPC likely to remain on hold but still very vigilant. They will continue, I think, to assess the shape of the recovery over the course of next few months before coming to a decision. While negative rates remain a remote option, the speculation around them being implemented appears to have almost evaporated.
So that was the global economy and financial markets last week. With the technology sector on investors’ minds given its ability to drive portfolio returns, I'm pleased to say I'm joined by our investment strategist Jai Lakhani to discuss its future prospects and in particular how to navigate through the volatile and expensive public market valuations.
Jai, good to have you with us today, let's start off. Why is technology so important for investors? Can it continue to deliver impressive returns after the past two decades?
Jai Lakhani (JL): Well, good morning Henk and thank you for having me. The short answer to your question is, it has been over the last 20 years and will continue to be the main driver of business growth.
The S&P 500, an index comprised predominantly of industrials three decades ago, has seen a significant step change. 2020 was the first time in 42 years that the top five components represented 20% of the index and all five members belonged to the technology sector.
It is quite telling that if you took out these big five, the S&P 500 would have returned minus 5% for the year in 2020. In terms of remaining the main driver, we can see this in the trend towards a new world.
This is already appearing with next generation technology such as 5G broadband happening. This is important as it is crucial that the technology is made widely available in order for the Internet of Things to become a reality.
The possibilities really appear limitless, with big data and cloud computing more and more becoming the norm as opposed to the hardware servers we've seen in the past.
HP: Okay so given those positive views on the technology sector, how should investors access the market given the expensive valuations that we see today?
JL: Sure, this is an excellent question and, of course, investing 101 always comes down to yes buying the winners, but at the right price to really capitalise. Although accessing technology through public markets could be a way to tap into the longer term growth, high and volatile valuations make it harder to do this.
There is also the issue of the Biden administration proposing tougher regulations on big tech. So volatility could be here to stay. It's also worth noting that as companies get larger, the impact of their innovation tends to fall significantly.
So, in order to answer this question, if you want a solution which could accommodate getting access to innovation and technology in a more disruptive fashion and at an earlier stage, private markets is quite attractive.
You get access to these companies early on and through quality managers with experience you identify and manage target companies and play a vital part of the innovation process. The opportunity set also appears to be more favourable. You've had K1 CEO Neil Malik on this podcast and he's made this exact point.
The opportunity set ranges from venture capital, growth, and more mature private equity strategies meaning investments can be more closely aligned to risk preferences. In terms of really capitalising, according to private equity house Carlyle the average median age of tech companies filing for initial public offerings has grown from about five years to 12 years a decade later and valuations at the IPO stage have been consistently higher.
And as we talk about the expensive nature, in terms of public markets, valuations appear much more affordable in private markets. Data from Pitchbook and Bloomberg showed the 2021 estimated median EV/EBITDA multiples for private markets is 13.9. This is notably lower than the 15.5 for tech companies in the NASDAQ 100.
HP: So the solution of investing in technology through private markets. What do investors need to be aware of? What they need be prepared for? What are the main risks with investing this way?
JL: Well, of course, no investment comes without risk to consider and private markets are no exception to this. The key risk with private markets is that investments are very illiquid in nature as the private equity fund fundraises and then over time deploys the capital.
So investors will need to be prepared for their capital being locked up for a significant period of time and with restrictions on the transfer of these shares. Secondly, what private market gives in terms of less volatility in public markets it takes away with fair valuations being harder to obtain from time to time.
What we mean by this is that even if an investor wanted exit their position earlier, they may not do so at a price that is reflective of the underlying investments. The risks highlight the importance of one key message, which is the importance of manager selection to make such a commitment worthwhile.
Ultimately it makes sense to enter into private markets, and technology in particular, with a view for the long term and private markets have proven to be an effective diversifier in the portfolio, but investors must be able and willing to forgo capital for a period of time.
HP: Well thank you Jai for your insights today. There's no doubt technology will be the key to future growth and will play an important role in generating returns for investors.
Moving onto the week ahead, another round of central bank meetings are on the cards. People's Bank of China along with emerging market central banks, the likes of Hungary, Thailand, South Africa and the Philippines all expected to keep policy rates unchanged, although Mexico’s central bank may decide to cut rates this week given its recent dovish tone.
In the UK, the unemployment rate, as we know, has remained fairly low while furloughed workers are classes as employed. The extension of the furlough scheme until the end of September should keep the UK employment rate fairly stable until then.
Therefore, Tuesday’s January data is unlikely to show a great change in unemployment, though we do expect a small uptick from December. Retail sales in the UK slumped 8.2% month on month in January, the largest fall since April 2020 as the third national lockdown hit consumption hard.
However, the proportion of spending done online continues to rise, in fact hit 35% that's the highest that we've seen on record.
Friday’s February retail sales data will indicate whether consumers have increased their buying during the course of the second month of national lockdown or are choosing to hold back their spending for the reopening that's going to take place in the spring.
With that, I'd like thank you once again for joining us. We will be back, of course, next week with our latest instalment but for now may I wish you every success for the trading week ahead.
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