Last week’s rebound on Wall Street saw the recent bearishness in Nasdaq stocks, especially biotechs replaced by a renewed bullishness – but for how long?
The return of confidence to tech stocks is either a ‘dead cat bounce’, meaning there’s another sell-off around the corner, or a regaining of confidence by investors in the high valuations of many of these stocks, especially biotechs.
The cast of tech companies reporting first quarter results this week in the US will give last week’s return to confidence a nice old work out – they include Apple, Facebook, Amazon, Microsoft, Qualcomm, Netflix, and biotechs such as Gilead Sciences, Biogen Idex and Ilumina.
The latter trio have been among the big fallers in the Nasdaq biotech sector, but Facebook has been weak as well.
Google’s quarterly figures last week were under some market estimates and saw the shares easier as a result.
But Wall Street rose 2.7% last week, while the Dow and the Nasdaq each ended up 2.4% as investors recovered their nerve.
Overnight Monday markets were either closed, fell (in Asia), or traded modestly higher in the US with no real trend emerging.
But if the latest bout of confidence can survive any disappointments in that list of tech giants and wannabees, the recent sell-off could very well be behind us.
But big global investors aren’t taking any chances as the April investor survey from Bank of America/Merrill Lynch, released just before Easter, reveals.
There’s been a decided swing away from growth stocks towards value (more boring). Growth stocks are now on the outer.
The survey shows that a net 40% of investors surveyed (covering hundreds of billions of dollars in global and regional funds) believe value stocks will outperform growth stocks over the next 12 months, more than triple the level in March and an all-time high.
That is a significant swing in sentiment. The question is whether the change represents a new thinking, or the catching up to what has been happening in the US markets, especially in tech stocks, in the past month?
The survey was taken in the first week of April when the Nasdaq sell-off was at its most intense – perhaps a survey taken late last week might have seen a slightly different, more upbeat result for growth stocks (the so-called momentum big caps like Apple, Facebook, Tesla and Gilead Sciences).
“Recent market volatility has led investors to ‘taper’ their extreme bullishness on U.S. growth-plays and extreme bearishness on emerging markets,” Michael Hartnett, chief investment strategist at BofA Merrill Lynch Global Research said in the survey.
And this change of heart over value stocks might help explain the continuing scepticism about the value of investing in US markets (which are the home of ‘growth’ stocks on Nasdaq especially).
Regionally, a net 66% of global fund managers believe the US is still the most over-valued equity market, little changed from March and February.
That has many looking again at emerging markets – a net 55% think these are undervalued, up from 49% in March and the highest reading ever.
In addition, only a net 2% would like to underweight emerging markets, down sharply from 21% in March.
Now, given that the prospects for emerging economies haven’t improved for Brazil, Turkey, China, India, certainly Russia which has gone backwards, Indonesia, Malaysia and Thailand, it’s hard to understand the upsurge in confidence in emerging markets other than it’s not one based on fundamentals.
“After two years of cyclical outperformance in Europe, some of the exuberance we see in investor sentiment and positioning suggests a rotation into more defensive stocks and sectors may be imminent,” said Obe Ejikeme, European Equity and Quantitative strategist.
In Japan, the boost provided by the launch of “Abenomics” over a year ago continues to wane.
Only a net 13% of investors are still overweight Japanese equities, down from 16% in March and 30% in February.
Similarly, only a net 16% of managers surveyed have a favourable outlook for Japanese profits, down from 18% last month and 28% in February.
That growing scepticism about Japan has been seen in the sell-off in Japanese shares in the past two months.
And globally, big investors remain confident about the world economy with some 62% believing the global economy will grow over the next year, unchanged from last month and up on the 56% in February.
That view supports expectations for profits – a net 44% of investors surveyed believe profits will improve over the next 12 months, up from 40% in March and February.
But expectations of higher short-term rates are growing with a net 66% of those surveyed seeing short term rates rising over the next year, up from 55% in March and February.
An overwhelming majority (a net 72%) believe long term rates will rise in the next 12 months, down from 74% in March and 73% in February.
