Market Spotlight: Trading NFP & Treasury Yields

NFP In FocusThe big data focus today is the April NFP release in the US. Following the prior month’s bumper 916k reading, the market is looking for a further increase over April to 990k. The rising optimism around ongoing vaccination success and the gradual reopening underway is supporting the view that the economy will have added extra jobs last month. In line with the upside surprise seen over the prior month, it seems that risks are skewed to the upside for USD with the unemployment rate also forecast to have fallen lower to 5.8% from 6% prior. If today’s labour market report comes in above expectations, USD is likely to reversed recent losses and trade higher. On the other hand if the report undershoots expectations, this will likely see the current USD decline continue across the next week.Where to Trade the NFP? US10YTreasury yields have come off recently, following the highs printed in March. For now, price continues to correct lower within a bull flag formation and is hovering around the 1.584 region. If data surprises to the upside today, there is room for the market to advance higher targeting a break of the channel top and a move back above the 1.685 level. To the downside, a drop lower on the back of today’s data will target the 1.424 level support next.Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/market-spotlight-trading-nfp-and-treasury-yields"
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BOE Forecasts Biggest UK Economic Recovery in 70 Years

GBP In Demand The British Pound has been gaining against a broad basket of counter-currencies over the European morning on Friday, buoyed by a more optimistic tone from the BOE yesterday. The UK central bank’s May “Super Thursday” event had attracted a great deal of attention over speculation that the BOE might announce tapering of asset purchases. While no adjustments to either its rates or quantitative easing program were announced, the bank’s updated forecasts and forward guidance contained plenty to go off.GDP Forecasts Revised Higher In its updated forecasts, the bank is now projecting growth of 7.25% in 2021, up from the 5% forecast issued previously. This would mark the strongest UK economic recovery since 1941 with the bank citing the success of vaccinations and the UK’s reopening programme as the main drivers behind the expected lift in consumer spending. In its report, the BOE said: "GDP is expected to rise sharply in 2021 second quarter, although activity in that quarter is likely to remain on average around 5% below its level in the fourth quarter of 2019. GDP is expected to recover strongly to pre-COVID levels over the remainder of this year in the absence of most restrictions on domestic economic activity."Services Sector Rebound This more optimistic message from the BOE comes hot on the heels of the IHS/Markit services PMI which saw the non-factory sector reading surging to 61 last month. While the manufacturing sector had remained resilient throughout the pandemic as a result of the boom in demand from online hopping, the services sector had been hard hit, so news of a solid recovery will be well received by the central bank.Inflation to Rise But Bailey Urges CautionNotably, the services PMI also included a further increase in producer input prices, which now sit at their highest level in four years. Rising input costs have been one of the key themes driving the lift in rising inflation expectations. However, BOE governor Bailey said that as yet, there was no evidence of higher output costs as a result. Looking ahead, however, Bailey noted that the bank expects CPI to surpass 2% by year end though cautioned that the spike is expected to be temporary and the bank will retain accommodative monetary policy over the course of the recovery. Finally, Bailey warned that despite the optimistic outlook, downside risks remain and urged markets not to get “carried away” by the current recovery.Technical Views GBPJPYThe recovery bounce off 149.55 continues today with price drifting back towards the 152.78 level. With little momentum in the market currently, the level is likely to hold at first test, continuing the range which has framed price action over recent weeks. While 149.55 holds, however, the focus is on a further break higher towards the 156.39 level next. To the downside, a break of 149.55 will open a test of 146.78 next.Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/boe-forecasts-biggest-uk-economic-recovery-in-70-years"
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Greenback and Lonnie on backfoot ahead of Labour data

The April nonfarm payroll estimates varies from 850k to 978k, though market estimates are skewed to the high side of the forecasts likely due to big declines in initial claims through the month, and big increases in both consumer confidence and producer sentiment. Yet, our “restrained” rise is consistent with our 9.0% Q2 GDP growth estimate, and the diminishing downtrend in continuing claims. We expect the April workweek to hold steady at 34.9, with gains of 0.7% for hours-worked and 0.2% for hourly earnings, alongside a jobless rate drop to 5.7%.

The latest release left us with net revisions from “as reported” figures of +89k in February, +184k in January, and -166k in December. For 2020 we saw a -444k net downward revision from “as reported” headlines. We saw a net upward revision of 82k in 2019, and a -111k net downward revision in 2018. We saw prior net upward revisions of 9k in 2017, 200k in 2016, and 12k in 2015.

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The market so far has been in narrow ranges ahead of NFP but also due to the anticipation of BOE which reported its monetary. Today’s US Nonfarm payrolls and Canadian jobs data are expected to impact the market and more precisely US Dollar and Canadian Dollar. On the back of this, recovery optimism as the ultra-easy monetary and fiscal policies, massive government stimulus, vaccines, robust corporate earnings, increasing optimism. Even though this optimism is already priced in the jobs report today might be  a source of volatility for the currency market today.

However after today’s data the attention afterwards will fall on whether the ability of vaccines to cool down hotspots will continue, whether there will be further assurances by central bankers that rate lift off is a long way away. In the meantime the mix of growth and inflation in the economic data will continue to drive markets in May.

Now from technical perspective, our eyes today turn to USDCAD on the release of jobs from both counties. Currently the USDCAD steadied after hitting its lowest level since September 2017, at 1.2144, yesterday, on USOIL rise due to large draw on US crude stockpiles, though this has been offset by the pandemic situation in India, which is in crisis and is accordingly imposing lockdown restrictions. India is the world’s third biggest oil importer. Canada’s April jobs report is expected at 300.0k plunge in headline employment, which would largely reverse the 303.1k surge that was seen in March, and which was a consequence of increased pandemic lockdown restrictions in Ontario and other regions. The unemployment rate is seen jumping to 8.4% from 7.5%. In the bigger picture, the Canadian Dollar outlook remains bullish, as USDCAD remains in a downwards channel since March 2020.

Medium term momentum indicators are negatively configured with daily MACD extending southwards, RSI at 30 and Stochastics at 12.70. In terms of trend, the next Support area for the asset is at multiyear lows, i.e. 1.2000-1.2050 area and if that breaks next Support is back on May 2015 and the 1.1920 low.

Summarizing, the negative bias for the asset sustains as the trend reversal signal remains absent, while in the short term  only a move back above 1.2240 area could  trigger a near term bullish wave towards 1.2300-1.2350 high.

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Back to a quick breakdown on today’s upcoming NFP release. Even thought there is an upside risk on today’s release, the seasonal impact through the year on payroll changes is mostly positive, but is negative in December, January and July. Distortions of last year’s COVID-19 would have produced negative averages for March and April now as well. For disruptions to employment from weather as gauged in the household survey, the biggest disruptions occur in the winter months generally with the average peaking in February. There is an additional climb through the late-summer months due to disruptive hurricanes in some years.

In addition, the average net birth/death effect rises to 215k in April from 80k in March, 117k in February, and -306k in January. Its annual high typically occurs in April and its annual low in January. After the January low, the month of July marks a summer trough for the average which becomes more volatile in the second half of the year, oscillating between negative and positive territory with a second half trough in September and a peak in October.

Key as always along with the NFP number is the Average hourly earnings which are assumed to rise just 0.2% in April, as we further unwind the December distortion that left a 1.0% earnings surge with a big drop in low-wage workers. The y/y wage gain should fall to -0.2% from 4.2% as we hit a hard comparison. Swings likely still largely reflect the percentage of lower paid workers in the jobs pool, as seen with the 4.7% surge last April and the 1.0% pop in December.

We previously saw a 3.5% expansion-high pace for y/y wage gains in both February and July of 2019, before the pandemic-boost to an 8.0% peak in April of 2020. We expect a robust payroll trajectory in 2021 following the winter lull, thanks to stimulus deposits and vaccines.

Nevertheless, after yesterday’s ADP undershoot with 74k 2April ADP rise the 780k private BLS payroll estimate , a neutral signal for the nonfarm payroll estimate. even thought the April rise was the biggest increase since the 821k gain in September, the “as reported” ADP figures undershot the BLS payroll data in both February and March, and have generally posted undershoots through the pandemic, though we did see overshoots in December and January.

Click here to access our Economic Calendar

Andria Pichidi

Market Analyst

Disclaimer: This material is provided as a general marketing communication for information purposes only and does not constitute an independent investment research. Nothing in this communication contains, or should be considered as containing, an investment advice or an investment recommendation or a solicitation for the purpose of buying or selling of any financial instrument. All information provided is gathered from reputable sources and any information containing an indication of past performance is not a guarantee or reliable indicator of future performance. Users acknowledge that any investment in Leveraged Products is characterized by a certain degree of uncertainty and that any investment of this nature involves a high level of risk for which the users are solely responsible and liable. We assume no liability for any loss arising from any investment made based on the information provided in this communication. This communication must not be reproduced or further distributed without our prior written permission.

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Troy's Gabrielle Boyle: for global companies, sustainability is just good business

Merryn talks to to Gabrielle Boyle of Troy Asset Management about the top quality global companies in her portfolio, and why those firms that invest in sustainability, diversity and a better future will have a competitive advantage over those that don't.

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Could you end up paying inheritance tax on your family home?

• SEE MORE Inheritance tax bills are set to rise – will you be caught out?

For most people worrying about inheritance tax (IHT), property is the single biggest issue.

The value of the average home in the UK has risen by 53% since April 2009 according to Nationwide Building Society – and by more than 90% in some parts of the country. That date is significant because it’s the last time that the nil-rate band for inheritance tax was increased.

In short, during a period when the value of the average property has risen from £152,000 to £231,000, the nil-rate band, which governs the value of estates that can be passed on free of tax, has remained stuck at £325,000.

So people who a decade ago would never have come close to hitting the threshold may well now find themselves squarely within it – particularly those who live in regions of the UK where house prices are particularly high.

And this is only likely to affect more people as prices keep rising while the threshold stays right where it is.

The good news – there’s a special allowance for the family home

One problem with property is that not only is it likely to account for a large chunk of your wealth, it can be hard to do anything about. While you may be able to reduce the value of your estate by giving away more liquid assets, your home poses more challenges.

As well as a house being illiquid (in other words, it takes time to sell), many people naturally have a strong emotional connection to their family home. They may be reluctant to sell up while they are still alive, even if this makes sense for inheritance tax planning purposes. Their heirs may not wish to sell up either, but end up with no choice if a large tax bill looms.

However, it’s not all bad news. While the nil-rate band (after which inheritance tax is due at 40% – see my previous article on this) will stay at £325,000 until at least the 2025-26 tax year, the David Cameron government introduced an additional inheritance tax allowance for the family home, which was implemented in stages between 2017 and 2020.

This “main residence nil-rate band” kicks in if you are passing your home to a direct descendent. It gives you an extra £175,000 inheritance tax-free allowance. In practice, this means that the inheritance tax threshold for most people is now £500,000, as long as at least £175,000 of the value of their estate comes from their family home.

Couples get a joint allowance. As a result, they can leave estates worth up to £1m to their heirs with no inheritance tax liability, as long as £350,000 of that value comes from their home.

There are some important caveats to bear in mind. First, you only get the main residence allowance if you are leaving your home to your children or grandchildren (including stepchildren, adopted children and foster children). Nieces and nephews, for example, do not qualify as direct descendants; nor do friends.

Also, special rules apply on estates worth more than £2m. For each £2 that your estate is worth above this threshold, you lose £1 of the main residence nil rate band. So if your estate is worth more than £2.35m, your heirs won’t benefit from any of this extra allowance.

The main residence nil-rate band applies to only one home. It must be included in your estate – not held in a trust - and you need to have lived in it at some stage in your life. But it does not have to be the property you were living in at the time of your death, or to have been owned for a minimum period. And if you own more than one home that qualifies for the allowance, the executor of your estate can nominate which one should be used.

Other minimisation methods to consider

When George Osborne, the chancellor at the time, announced the main residence nil rate band in the summer of 2015, he said it would “take the family home out of inheritance tax for all but the wealthiest”. And the change has certainly had a discernible effect: the number of estates on which inheritance tax is payable and the Treasury’s receipts from the tax both began to fall as the allowance was phased in.

However, the trend is likely to be temporary. With house prices continuing to rise – and no plans for increased inheritance tax thresholds before 2026-2027 at the earliest – more estates will inevitably breach the nil-rate bands even after taking the additional property allowance into account. In more expensive parts of the country for housing, many properties are already caught.

Families worried about this issue may need to take specialist advice on how to mitigate a future inheritance tax bill. There are several options, but the inflexibility of property can pose challenges. You can give your home away, for example, but if you continue living in it and do not pay a commercial rent, you will be deemed to have retained ownership for inheritance tax purposes.

Trusts can be useful ways to manage property more tax efficiently, but these are expensive and come with upfront inheritance tax levies. STEP, the trade body for specialists in estate planning, including lawyers and accountants, can put you in touch with advisers in your area.

Other options include equity release plans, which allow you to borrow against the value of your home without having to make repayments during your lifetime – thus reducing the size of your estate by the outstanding debt. But take professional advice before making such an arrangement.

This is the second part of our series on inheritance tax. For more, subscribe to MoneyWeek magazine and get your first six issues free – sign up here today.

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Investment Bank Outlook 07-05-2021

Citi EURUSD has bounced from strong support near the 1.2000 handle to end the session 0.5% stronger at 1.2060. Spot has held around here in Asia since Asia. CitiFX Strategy reiterates their structural bullishness in the pair, and notes that the latest decline in COVID cases should signal stronger upside ahead. CitiFX Technicals sentiment, looks for a potential run up towards the recent high at 1.2150.AUD: pared losses related to China tensions, and closed NY around 0.7780. It has continued to hold around here in Asia since. CitiFX Technicals flags the pair has co day in addition to complete an inverted head and shoulders formation. The team sees a pivotal resistance range ahead at 0.7813-0.7826.GBP: despite gains for the rest of the G10 complex was an outlier amidst Thursday’s price action, and depreciated -0.1% to 1.3895. The performance was likely a reflection back of an earlier MPC decision, in addition to Scottish elections. On the former, the BoE opted for a technical QE taper with to GBP3.4bn/wk per expectations. Forecast r positive with inflation expected to remain on target assuming market expectations of the Bank Rate at 0.3% in 2Q23 and 0.6% in 2Q24 hold. We remain biased to buying assets are under-owned against a backdrop of strong support from reopening timeline and value rotations. JPMorgan NFP will be the event of the day and after some decent profit taking from the HF sector with this data and seasonality in mind the market is certainly a lot cleaner, however the incredible RM streak of USD selling continues and there is a decent risk in the next few sessions USD bears, including myself, will have to stop back in. No strong view in sterling for now, RM were a notable seller yesterday (z-score of 2) snapping their recent run of purchases, BOE’s Broadbent and Haldane will be speaking at 12.15 BST, 1.3930/40 is initial resistance with 1.4000/10 above (0.8715/20, 0.8795 EURGBP) while 1.3835/40 is initial support with 1.3800/10 below (0.8615/20, 0.8580/90 EURGBP).Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/investment-bank-outlook-07-05-2021"
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FOMO Friday: Amazon Shares Collapse

Amazon Takes The PlungeAs we wrap up another week, I’m always interested to learn the trades that people are talking about, winners and losers. But it always seems the most interesting trades are the ones that people didn’t take, the trades they missed! Recently we’ve been focusing on trades within the FX space so this week I decided to cast my net a little further afield and spoke with some stock traders I know and the move that everyone is talking about is the roughly 7% drop in Amazon. So, if you got in on this trade, I’m sure you’re looking forward to a weekend of celebration. If you missed out? Just remember, there’s always next week. So, let’s take a look at what happened and why this was a great trade.What Sent Amazon Lower?At first glance, the sell-off in Amazon shares seems counter intuitive. The company posted stellar Q1 earnings at the end of last week with EPS almost double the target Wall Street was looking for. Price had surged back up to its highest level since September last year and it was looking good for the online retailer before selling kicked in and drove price firmly lower. So, one of the big drivers behind this sell off was merely profit taking. Amazon was expected to have a great earnings release, price rallied firmly into the release, hit previous highs and traders cashed in. This is a common theme around these events.Bezos Sells More StockNow, this situation was exacerbated this week by news that Amazon CEO Jeff Bezos has sold around $2 billion in stock following that earnings release. This is the latest in a series of sales from the Amazon founder and the level of supply hitting the market has clearly impacted price, fuelling the current decline.Added to this, there is a certain level of uncertainty in the outlook following Amazon’s bumper earnings call. The company has ballooned in size over the course of the pandemic with lockdowns and social restrictions fuelling a rise in online shopping. However, as vaccination progress continues to grow and reopening gets underway on a larger scale, many are judging that the company’s performance has peaked and will likely decline over the remainder of the year.Ok, so, now we’ve walked through the fundamental backdrop, let’s take a look at the technical picture.Technical Views AMAZONThe test of 3551.23 saw heavy selling kick in with price breaking down below two key support levels. The market is currently fighting to get back above the 3303.66 level. If price can sustain above this level, a further move higher is still in view. Below there, however, and the focus turns to the 3181.15 level support next up.Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% and 65% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

from Tickmill Expert Blog - Forex Traders Blog https://www.tickmill.com/blog/fomo-friday-amazon-shares-collapse"
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Three Asian tech stocks that lead the way in innovation

My personal take on the opportunities within Asia is based on companies that can achieve leading positions in either their home markets, or regionally and globally. The Asian consumption story is well known but the new facet is the growth in commercialisation of home-grown intellectual property. The perception of Asian companies as copycats and consumers of Western innovation is now outdated. So a portfolio of Asian shares should extend beyond traditional consumption themes. Asian companies are climbing up the value chain, disrupting Western oligopolies and beginning to lead industry trends.

Taiwan’s leading-edge chipmaker

TSMC (Taipei: 2330) is the world’s leading semiconductor foundry, based in Taiwan. It is one of the very few players capable of producing the leading-edge microchips used in high-performance electronics and is well placed to capitalise on structural demand arising from digitisation, 5G and artificial intelligence. The outlook is positive: revenues are growing at 20% a year and the company will invest US$100bn in producing advanced microchips over the next three years.

The story of the semiconductor fabrication industry is one of consolidation. As the technological challenges and the costs of improving processing power have mounted, even Intel, historically at the forefront, has been struggling. This leaves just two Asian players standing, with TSMC leading in logic chips and Samsung Electronics in memory chips. 

Nidec (Tokyo: 6594) is a Japanese company that manufactures half of the world’s brushless direct current (DC) motors. The company has built its leading position via research and development over 50 years on delivering ever smaller, more powerful motors with superior energy-efficiency. It enjoys scale advantages and breadth in its end-markets, supplying sectors ranging from drones to robots and industrial machinery. It is now leveraging the same skill set into traction motors required for the global electric-vehicle (EV) market. 

Nidec is targeting a 40%-45% share in a market with huge potential as the demand for EVs explodes, with new players entering the market including Apple and Xiaomi. Nidec’s strength as the core supplier of critical components allows it to benefit from the overall growth of the market.

Entertaining Gen Z 

Bilibili (Hong Kong: 9626) is China’s go-to online entertainment platform targeting Generation Z, with over 200 million active users. It is a unique blend of Youtube, Twitch and Netflix, featuring user-generated content, live-streaming, e-sport hosting, and professional video productions. 

It stands out among its countless peers, preserving a distinctive quirky identity thanks to its anime, comic and gaming (ACG) heritage. A community experience is cultivated through innovative interactions, encouraging high user engagement and retention. It also consciously curates an ecosystem supporting quality content and content-makers that will sustain creativity in the long run. 

Businesses are increasingly turning to Bilibili to connect with China’s youth. The platform is expanding at an annual rate of over 70% with multi-faceted revenue streams; key areas include gaming, advertising and e-commerce. 

from Moneyweek RSS Feed https://moneyweek.com/investments/stocks-and-shares/share-tips/603202/where-to-find-the-leaders-in-asian-innovation
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South Korea’s economy shrugs off the pandemic

South Korean retail investors have declared war against short sellers, says Youkyung Lee on Bloomberg. The country this week ended the world’s longest pandemic-era ban on short-selling, which had been in place since March last year. 

The ban helped the local Kospi index soar 27% last year, the strongest showing from any major world market. Retail investors have been piling in, with 95.5trn won (£62bn) in net buying since the ban was introduced. 

Individual traders now make up more than three-quarters of the Kospi’s daily trading volume. Fearing that short sellers will now destroy their gains, coalitions of investors have said they will inflict a GameStop-style rout on short-sellers if the market takes a tumble.  

GDP rose by 1.6% in the first quarter to eclipse its level of late 2019, says Robert Carnell for ING Think. Growth for the year as a whole could now hit 4%. Strong global electronics demand has been a boon for the home of Samsung. The country is considered a bellwether for global trade. Exports have remained strong amid Chinese demand; US and European reopening should now deliver another boost. South Korea has done an excellent job of controlling the virus but its vaccine rollout has been very slow. The chaos in India is a reminder that sudden reversals of fortune are still possible during this pandemic.  

Despite high incomes, the country remains classified as an emerging market. Indeed, Korean shares make up 13% of the MSCI EM index, more than India or Brazil. 

On a cyclically adjusted price/earnings ratio of 18.1 the local market is at the cheaper end of global valuations. That partly reflects a “chaebol discount” – the country’s corporate giants have long been plagued by doubts about the quality of corporate governance.

from Moneyweek RSS Feed https://moneyweek.com/investments/stockmarkets/emerging-markets/603197/south-koreas-economy-shrugs-off-the-pandemic
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Tech stocks charge ahead

The pandemic has “catapulted” Big Tech to new heights, says The Wall Street Journal. Apple, Microsoft, Amazon, Facebook and Google-owner Alphabet have all reported record revenue growth in the first quarter of this year. Apple sold $47bn of iPhones during the quarter, a 66% year-on-year jump. Google’s advertisement sales rose by 32% on the year to $45bn. Combined, these five firms are now worth over $8trn, nearly one-quarter of the total value of the S&P 500.

The big five took in combined revenue of $322bn during the first three months of the year, adds Richard Waters in the Financial Times. Their joint after-tax profits soared by 105% on the year to hit $75bn. Lockdowns meant the tech giants enjoyed a superb 2020, but the conventional wisdom had been that things would return to normal this year. Instead, these numbers suggest that Covid-19 delivered an online “reset” to our lifestyles. The Big Tech firms will continue to profit from the world’s newfound “digital dependence”. 

Expensive for a reason?

It’s now clear that the tech giants were a “raging bargain” when their shares fell during the early days of the pandemic, writes Eric Savitz in Barron’s. Since last March Microsoft shares have gained 85% and Apple stock has soared by 135%. The latest earnings data shows that cloud businesses are roaring (see page 22), while e-commerce continues to conquer all. Even PCs are enjoying record-breaking sales growth. Steep valuations and the growing clamour for regulation are risks, but there “are no better plays for the post-pandemic world” than Big Tech stocks.

Tech shares were the standout market performers last year but have been adapting to the unaccustomed role of “market laggards” in 2021, says Jeran Wittenstein on Bloomberg. Investors have been rotating into cyclical sectors such as financials and industrials, which stand to gain from reopening and look far cheaper in comparison. On 41 times trailing earnings, the tech-focused Nasdaq 100 is at its priciest since 2004. The big question is whether those firms can convince investors that the huge structural shift towards digital is enough to justify such steep valuations. 

The rise of Big Tech has driven the long-term outperformance of US shares. As David Brenchley notes in The Sunday Times, the MSCI USA index has gained 641% since the 2009 low; other global markets have risen by 246% over the same timeframe. 

On some metrics US shares are now more expensive than at any time in history save for the eve of the 2000 dotcom bubble implosion. Some asset managers think there are still pockets of value stateside. Perhaps. But remember that as the world’s “biggest and most high-profile market”, the US is thought to be the hardest for stockpickers to beat. 

from Moneyweek RSS Feed https://moneyweek.com/investments/stocks-and-shares/tech-stocks/603198/tech-stocks-charge-ahead
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Why homebuyers should be wary of the new crop of 95% mortgages

The government has rolled out its latest weapon in the battle to turn Generation Rent into Generation Buy. A new state-backed mortgage scheme, launched in mid-April, aims to help prospective home buyers with 5% deposits. First-time buyers and existing homeowners who are moving are eligible, up to a purchase value of £600,000 (second home and buy-to-let acquisitions are excluded).The help takes the form of a guarantee to the lender: the state will step in for the portion of the loan over 80% if the buyer defaults. 

The latest state subsidy for the housing market aims to address a shortage of 95% loan-to-value (LTV) options. Data from comparison site Moneyfacts shows that there were 391 such mortgages on the market in March 2020, but one year later the figure had plunged to just five; the arrival of Covid-19 caused lenders to batten down the hatches. That number is now back on the rise courtesy of the loan scheme. 

So is it worth a look? The plan does not directly improve affordability. Buyers will still only be able to purchase properties worth 4.5 times their income in most cases, so the main beneficiaries will be those who are already earning enough to afford a property in their area, but who have been struggling to get together a big enough deposit. It won’t help if you live in a place where property prices are simply out of reach.

The biggest drawback of higher loan-to-value mortgages is that they increase the risk of negative equity (when the value of a property falls below the outstanding mortgage balance). Many worry that the property market is already overheated. 

With a 95% mortgage it takes “just a small fall in the value of the home” to tip a borrower into negative equity, says Shane Hickey in The Observer. That can make it hard to move. And securing a new fixed-rate mortgage when renewal time arrives can also be challenging. 

Another problem, says Stephen Maunder on Which.co.uk, is that 95% mortgages are not attractively priced. Pre-pandemic, 95% two- and five-year fixed mortgages were going for less than 3%. A year later those rates are now closer to 4%, suggesting that lenders are still “sizing up the market”. That compares with rates of around 3% on the 90%-fix equivalents, which are still up by “more than 1%” since Covid-19 took hold. 

Mortgage rates for those with small deposits are still “close to a three-year high”, adds Kate Palmer in The Sunday Times. Brokers report that up to 19 out of 20 applications for 95% mortgages are currently failing to get to the agreement-in-principle stage. That is due to tough credit-scoring and affordability criteria. To ensure a speedy approval get all the paperwork ready beforehand, including “three months of payslips and two years’ employment history for the self-employed”. 

Given all the constraints, there has been no great “clamour” for the new loans. Many first-time house buyers are sitting out the current property-market frenzy. No wonder, says James Coney in the same paper. The housing market has “gone completely haywire”. When your estate agent looks this “delighted”, perhaps “you should stay put”. 

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Share tips of the week

Three to buy

tinyBuild

(The Daily Telegraph) Instead of developing its own games, tinyBuild takes on “promising titles from independent developers” and helps with funding, marketing and technical expertise. It is “becoming extremely profitable and cash generative” and “little need to invest in fixed assets” has translated into very high returns on capital. The computer-games sector is “bigger than film and music combined”, and tinyBuild will keep growing with it. 265p 

Crossword Cybersecurity 

(The Mail on Sunday) Covid-19 passports are being “actively explored” by governments and firms worldwide. With fraudsters “already at work” offering fake certificates, the documentation “needs to be secure”. Crossword Cybersecurity is working to ensure that Covid-19 certificates are “authentic and safe”. It has trials under way with the East Kent Hospitals University NHS Foundation Trust and some entertainment venues. It also “has several other strings to its bow”, including cybersecurity firm Rizikon, and already has food manufacturers, financial services providers, schools and local authorities as clients. 342p

Equals

(Shares) Electronic banking and international-payments firm Equals had a “tumultuous 2020”. On top of Covid-19, it was hit by the “implosion” of “now-defunct German firm Wirecard” as one of its services was backed by it. But its partnership agreements with firms such as Citi and Mastercard, top customer service and new products enabled it to keep growing. The UK payments sector is competitive, but it “stands out for the breadth of its proposition for both businesses and consumers”. It has £9m of cash and should also benefit once travel restrictions are lifted. 43p

Three to sell

Greggs

(The Daily Telegraph) “Greggs’ only liabilities are the leases on its 2,000-plus shops,” so it might seem “perverse” to suggest selling. But profits peaked before the pandemic at £92m, and its current market value of £2.4bn “equates to 26 times that sum”. Although valuation alone is never the “catalyst for a share price to falter… any hint of disappointment, any stumbles in the road out of lockdown, or even any doubts” could leave that valuation looking “a little exposed”. It’s time to “tuck away our profits” and sell. 2,349p

Sainsbury’s 

(Investors’ Chronicle) The bid rumours that had surrounded Sainsbury’s prior to its latest results “were considerably more interesting than the supermarket’s largely flat operational performance”. It hit its guidance for underlying profits at £365m, but will “chronic underperformance” keep dogging it once Covid-19 departs? The trading advantages brought on by the pandemic “were more than offset by the costs those restrictions imposed”: £485m in Sainsbury’s case. Its online operations grew, but the bank lost money. The “record of underachievement that goes back many years” makes the stock a sell. 239p 

Ocugen

(The Motley Fool) Ocugen’s partnership with India’s Bharat Biotech has generated excitement since it was revealed that their jointly developed vaccine was 100% effective against severe Covid-19 cases. But the US “may already have all the vaccines it needs”. The firm will get 45% of the profits the vaccine generates in the US, but 30% of people in the US have been fully vaccinated and 43% have had at least one dose. There is nothing else in the pipeline. Avoid. $15.68

...and the rest

Shares

Music and audio products company Focusrite continues to post impressive growth. It revealed a 91% year-on-year increase in sales to £95.3m for the six months to February 2021. Successful acquisitions continue to expand the firm’s footprint. Buy (1,209p). Credit hire and legal services firm Anexo was an “Aim star” in 2019. But the pandemic “caused a drop in traffic” in the first half of 2020 and its shares have continued to languish. Sell (133p).

The Mail on Sunday 

Speedy Hire rents out “hundreds of thousands” of building products ,“from traffic cones to massive machines”. It works with 87 of the top 100 construction firms and “thousands of one-man firms”. The shares have bounced strongly despite Covid-19. If you own the shares, hold; new investors can buy (76p). 

The Times 

InterContinental Hotels Group’s 2020 sales were 52% below 2019 levels at $992m. But “despite the battering, IHG… is in pretty good shape” and looks well placed to benefit from the travel rebound. It also has 1,815 new hotels in the pipeline, while $75m of cost cuts will bolster margins. Hold (5,151p). 

The Daily Telegraph

Residential Secure Income has seen the value of its portfolio rise to £345m after a successful acquisition. The trust said its “improved earnings position” meant it expects to resume full dividend coverage in July. It remains a “stable source of inflation-linked income”. Hold (98p). Shares in figurines retailer Games Workshop have gained 81% in a year. The company has done “fantastically well selling its products online” and it looks set to keep growing. Hold for now (10,900p). 

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Martin Sorrell’s spat with WPP

Digital-advertising firm S4 Capital has raised its annual profit targets after a strong first quarter, reports Alex Barker in the Financial Times. S4, founded by Martin Sorrell (pictured) after his acrimonious split with advertiser WPP in 2018, saw like-for-like revenue bounce by 35% in the first three months of the year thanks to account wins at BMW and confectionery giant Mondelez. The group is in a sweet spot as digital advertising gathers pace. S4 has grown to a £3.1bn valuation and plans to issue bonds to finance a £500m takeover war chest. 

Sorrell and WPP still have scores to settle. Last week WPP cancelled a long-term share award to its former employee, accusing him of leaking confidential client information to the media while he was still in charge. Sorrell has fired back with a level of derision worthy of a Trump tweet, dubbing the move “outrageous” and saying it was “driven by personal animus”, “envy” and “blind rage”. He has also mocked “WPP’s recent poor share price performance…WPP blew $1 billion by selling their 20 per cent stake in Globant at 52p, it now trades at over 220p…It’s a bit rich that they’re accusing me of leaks, given their own over the last three years.”

Sorrell won’t be feeling too out of pocket, says Dasha Afanasieva on Breakingviews. The shares WPP will withhold are worth at least £200,000. Yet the value of Sorrell’s 10% holding in S4 Capital has soared by 14% this year, leaving him £38m richer. WPP’s decision to go after its former CEO is a “false economy”. Valued at £12bn, WPP is only “inviting comparisons” with Sorrell’s £3bn “upstart”.

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Four dog-friendly UK holidays

“I’ve lit the hot tub, and your bones are in the fridge” is an unusual welcome, says Felicity Cloake in The Sunday Times. But then Nicola Mills “isn’t running your average campsite”. Each of the four yurts at Mrs Mills’ Yurts dog-friendly glamping site in Gloucestershire is “bigger than my living room”. Between that and sleeping in a normal tent, “I know which one I’d prefer to share with my bed-hogging cairn terrier, Wilf”. 

The yurts have wood-burning stoves and a little table set for dinner, complete with embroidered napkins and a decanter of sherry. The “striking” timbered roof has a stargazing hole above the double bed, “plump with blankets and cushions”; Outside, in the grounds of the Grade II-listed farmhouse, there’s not a caravan in sight – “just big blossomy fruit trees” and ducks. The yurts are well spaced out, and come with their own private terraces and designated bathrooms, which makes them “perfectly suited to social distancing”. From £270 for two nights, two sharing, mayhillglamping.co.uk

Furry friends welcome

Barnsdale Hall, a waterside hotel with stunning views over Rutland Water, is getting ready to welcome overnight guests from next month, including those of the canine variety. The hotel has now declared itself “officially dog-friendly”, with furry friends welcome in the grounds and sun terrace. Barnsdale Hall is set within 65 acres of conservation parkland, so it is ideal for long walks and bike rides. There are also tennis courts, a swimming pool, a gym, an 18-hole crazy golf course, and a spa replete with ESPA skincare treatments. From £360, barnsdalehotel.co.uk

A Pooh bear adventure

Dogs are also welcome at Ashdown Park Hotel and Country Club in East Sussex. The hotel was built in 1815 in the heart of Ashdown Forest, the inspiration for the Winnie-The-Pooh stories. While wild deer roam free through the 186 acres of woodland and lakes, guests have the added option of wandering through the hotel’s peaceful walled garden with herbaceous borders and a grand old greenhouse. The Country Club has been recently refurbished to include a fitness studio, indoor pool and six treatment rooms. There are also two tennis courts, a putting green, along with the jogging trails, cycling routes, and a variety of woodland paths taking you through the grounds and beyond. From £358 for two nights, ashdownpark.com

Walks in the Wye Valley

“Herefordshire is a county which welcomes pooches with open arms”, the local tourist board boasts. Great walking trails abound, such as the Mortimer Trail and Wye Valley Walk, and there’s also a range of dog-friendly accommodation available, including farm stays and self-catering cottages. Flanesford’s eight characterful cottages in the Wye Valley sleep between two and ten. From £327 for three nights in a three-person cottage, flanesford.com

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