WeeklyWatch – Tech stocks soar, but what about the economies underneath them?

11 August 2020

Stock Take

An exception to the trend

It appears that the damaging effects of COVID-19 aren’t being felt by all businesses equally. Amongst widespread talk of sectors (particularly travel, hospitality and brick-and-mortar retail) struggling to survive the pandemic, one industry is thriving.

Technology companies are booming – especially in the US, where many big tech companies have seen their share prices rise during lockdown and have reported strong earnings. In fact, the country’s Nasdaq stock index, which is laden with such companies, reached a record high four days straight last week.

Buoyed by the likes of Microsoft, Facebook and Amazon, tech stocks are soaring ahead. This may seem odd because the health of the ‘real’ economy is still licking its wounds inflicted by the pandemic, which took hold in March. Indeed, there are still high levels of global unemployment (as jobs data in the US showed on Friday), and the recovery across the world may be slower than people first hoped – for example, the Bank of England said on Thursday that the UK economy won’t bounce back to its pre-virus levels until the end of 2021.

So far, tech companies also seem to be well-insulated from the debate in Washington surrounding the next round of COVID-19 support. After talks fell apart last week, President Trump signed executive orders pushing certain measures through, including for a new jobless benefit that’s lower than before.

Anatole Kaletsky, Founder and Co-Chairman of Gavekal, an economics consultancy, notes:

“Investors are assuming that [technology] businesses are completely invulnerable to economic activity, like perpetual motion machines that can generate higher and higher profits regardless of what’s happening in the rest of the world.”

Should investors be worried?

But even though they’re flourishing now, tech companies aren’t completely immune from the economy around them. Their revenues still come from the people and businesses that make up the real world. For example, if lots of businesses run out of cash due to COVID-19 lockdown measures, then many of them will reduce their advertising spend with Facebook and Google.

So, should investors be worried about the gap between the health of the ‘real’ economy and the rising share prices of a narrow band of successful companies?

The disparity between the two is a cause for concern, says Kaletsky. However, he adds that the answer is not to avoid these companies completely while momentum drives their share prices higher and higher. Rather, responsible investors will maintain a well-balanced set of investments that isn’t heavily biased towards to any one business or sector.

Time ticks away for TikTok

One tech company that isn’t fairing so well is Chinese social media app, TikTok. Despite its unpreceded popularity among locked-down app users of all ages, Chinese stocks fell last week as Trump ordered new limits on American companies to stop them dealing with the app, and also the WeChat app.

The order says that the data collected by these companies would allow the Chinese Communist Party access to Americans’ personal information – and followed a similar move earlier this year against technology manufacturer Huawei, which also cited national security concerns.

This is the latest in a series of clashes between the US and China, as tension mounts between the two countries. Chinese stocks lowered on the news, with Tencent, the parent company of WeChat, seeing its share price sink on Friday and on Monday morning. Tech giant Microsoft is now in talks to buy TikTok’s US operations.

Trade talks set to resume

The US and China will resume talks on their trade deal later this month. How those talks play out will be one of several factors that will influence the direction of markets in the second half of this year. The upcoming US election is one such issue, argues Mark Dowding of BlueBay, which co-manages the Strategic Income fund for St. James’s Place.

US voters will go to the polls again on 3rd November, and the subject of China-US relations will be a big theme in the election. The pressures of such a battle might sway Donald Trump to act in a way that disrupts the trade talks between the US and China, says Dowding. He adds:

“Although the perceived wisdom is that the White House won’t want to risk detonating this deal and putting the stock market into a tailspin, there is a sense that Trump is becoming more erratic and desperate as the days pass.”

Regardless of the outcome of the US-China talks, investors will be mulling over the impact of either candidate proving successful. Technology stocks might also be as resilient to November’s election as they have been to COVID-19, but investors will pay close attention to the race, nonetheless.

Wealth Check

The COVID-19 crisis might be pulling people towards building up a cash buffer rather than saving for the long term, but it seems that UK savers’ preference for cash was on the rise before the pandemic took hold. The latest ISA statistics for the 2018/19 tax year show that cash ISA subscriptions increased by 1.4 million on the previous year, accounting for over three-quarters of all ISA subscriptions. That translates to a rise in payments into Cash ISAs of £7.3 billion.¹

This is a reversal of recent trends, which had seen Stocks & Shares ISAs attract a bigger share of the market. The figures also reflect the poor year for stock markets in 2018, as investor confidence was knocked by a list of problems, topped by the US-China trade war.

The stats underline the current challenges faced by those saving for the future, as savers lean towards a cash buffer to protect them against the effects of the pandemic. Savings rates are the lowest in history, and are likely to remain so for some time. On the other hand, the economic impact of the pandemic means that the short-term outlook for stock markets is uncertain.

Added to that, rising care costs are eating into inheritances that many were planning to put towards their own retirement savings. A study published last week by the ONS revealed that only 11% of people saving for retirement expected cash savings to make them the most money. Over 40% of people believe that property is the best option for their pension savings, compared to a third who favoured personal and workplace pensions.²

Read more about how to get more from your ISAs here.

¹ HMRC Individual Savings Account Statistics, June 2020

² Office for National Statistics Wealth and Assets Survey, August 2020

The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.

An investment in equities (funds) does not provide the security of capital associated with a Cash ISA or a deposit account with a bank or building society.

The favourable tax treatment given to ISAs may not be maintained in the future as they are subject to changes in legislation.

In the picture

The price of gold is on a roll – it has soared in recent months, breaking $2,000 per troy ounce for the first time in its history.1 The metal is known as a ‘safe haven’ asset – meaning that investors tend to buy it during times of uncertainty, because its value tends to fluctuate less than other assets.

However, it’s worth remembering that over the long-term, stocks and shares have historically performed better as investments than ‘safe haven’ assets. Since the 1970s, for example, the value of gold is up about seven times in real terms – whereas the S&P500 stock index in the US is up 22 times in that same period.

1 London Metal Exchange, 10/08/2020

The Last Word

“It won’t appeal to many people, but we only need one person.”

– Property executive Derrick Beare whose company has just listed a terraced block overlooking Regent’s Park in London for £185 million, making it the UK’s second most expensive home (if sold).

The information contained is correct as at the date of the article.

BlueBay is a fund manager for St. James’s Place.

The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place or Wellesley Wealth Advisory.

FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trademark of the London Stock Exchange Group companies and is used by FTSE International Limited under licence. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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