Rudi’s View: Technology’s Moment Of Truth

rudi-views
Always an independent thinker, Rudi has not shied away from making big out-of-consensus predictions that proved accurate later on. When Rio Tinto shares surged above $120 he wrote investors should sell. In mid-2008 he warned investors not to hold on to equities in oil producers. In August 2008 he predicted the largest sell-off in commodities stocks was about to follow. In 2009 he suggested Australian banks were an excellent buy. Between 2011 and 2015 Rudi consistently maintained investors were better off avoiding exposure to commodities and to commodities stocks. Post GFC, he dedicated his research to finding All-Weather Performers. See also "All-Weather Performers" on this website, as well as the Special Reports section.

Rudi's View | Nov 03 2022

In this week's Weekly Insights:

-Technology's Moment Of Truth
-Conviction Calls
-Research To Download


By Rudi Filapek-Vandyck, Editor FNArena

Technology's Moment Of Truth

Big Tech on Wall Street has fallen off its pedestal in October with share price weakness following the release of Q3 financials.

For some, like Meta (formerly known as Facebook) the latest disappointment simply added more pain for loyal shareholders who have now witnessed the share price tanking by some -70% from last year's peak.

While the consequences for the likes of Amazon, Apple, Alphabet (Google), Microsoft and Tesla have been less severe, they are making big headlines nevertheless and have started to sow the seeds of doubt among investors.

Maybe Big Tech is not immune from the global slowdown; might it pay the price for being over-owned by investors across the globe?

For investors in Australia, there are multiple important points of interest to consider.

The first is the observation that positive market sentiment will not be deterred - at least not by disappointments from individual companies, no matter how big their size or marketweight.

This could well turn out to be all-important (in the short-term) as market observers had formed doubts about the outlook for Big Tech and how markets might respond to upcoming "misses" and downgrades.

Even after recent sell-offs, the marketweight of the so-called FAANMG stocks still represents around 11% of the FTSE World Market cap, so it would not be much of a stretch to think where goes Big Tech, there follow global indices.

Apparently not so. Market sentiment post the general weakness in September is now firmly focused on central banks slowing down the pace of rate hikes - a global trend that started with the RBA pre-Melbourne Cup day meeting.

Previous rallies in US equities have run out of puff once the 50 or 60 day moving average or the 200DMA came in sight, so investors will be keeping a close watch on what happens next over the weeks ahead.

Currently, the 60DMA, while trending downwards, seems only another positive day away while the 200DMA, also trending south, is below 4100 for the S&P500.

Headaches building for the largest companies on earth also lends credence to forecasts for the Aussie share market to outperform international peers, in particular US indices.

If investors were to assume Big Tech's marketweight is now reverting back to pre-pandemic level, this implies either Big Tech share prices must fall by a further -25% or other equities combined must outperform by some 33%, according to calculations published by Longview Economics.

Let us assume the actual outcome will be somewhere in the middle of those two scenarios. This still implies large US indices have a natural headwind to overcome, which the ASX200 doesn't have.



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This month's newfound vulnerability for the world's corporate giants also shines a light on current trends in corporate earnings; trends that equally affect businesses in Australia.

Even without disappointments from Meta et al, statistics and trends for corporate profits in the US had started to look bleaker in comparison with previous quarters this year. But despite a general expectation that analysts' forecasts for corporate profits remain too high, and estimates need to fall by -15%-20%, the outcome thus far is less unified, much more polarised.

In simple terms: companies that were badly hit by covid, and are currently enjoying the re-opening recovery, seem to be performing better-than-expected. Others are facing emerging headwinds from inflation, rising rates and bond yields, and from down-shifting consumer spending.

Companies like Alphabet and Meta, for example, are essentially offering an insight into global trends in paid advertising. With economic recessions on the horizon for the UK, Europe and elsewhere, who should be surprised businesses are spending less on promoting products and attracting fresh customers?

Australia has the added benefit of a relatively oversized skew to miners, energy producers and financials. In particular the latter two sectors have witnessed positive revisions to earnings forecasts recently, which is in stark contrast to this year's overall trend, and again makes the Australian market a positive stand-out on the global platform.


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