The decline in the FANNGM (Facebook, Apple, Netflix, Nvidia, Google, Microsoft) stocks as a percentage of S&P500 market capitalisation probably has much further to run, partly because of Apple, which now has the greatest downside risk on the last man standing theme, said Christopher Wood, global head of equity strategy at Jefferies in his recent note to investors, GREED & Fear.
Nvidia and Netflix have fallen 55% each in the year to date. Facebook’s parent Meta Platforms is down 74%, while Google parent Alphabet has shed 43%. Microsoft and Apple have slid 36% and 23.7%, respectively.
The capitulation in Big Tech stocks last week came at the same time as Exxon Mobil hit an all-time high on the release of its third quarter earnings. Wood characterised this as “the revenge of the physical” theme after the orgy in digitalia triggered by the pandemic.
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“If the catalyst for Big Tech de-rating is clearly the impact of rising discount rates on lofty valuations, investors should also remember the potential for the unwinding of passive driven investment strategies. This ongoing process can be seen in the peaking out of S&P500 index ETFs and the subsequent, albeit so far moderate, decline,” said Wood.
Money markets now expect a peak in the federal funds rate at 5.0-5.25% by May 2023, which may be the peak in tightening expectations, barring some Ukraine-triggered surge in energy prices.
Wood said there is potential for a tactical rally at the year end if the US October CPI report, to be published on November 10, raises renewed hopes of a peaking out of inflation despite Fed chair Jerome Powell’s more hawkish tone at his press conference on Wednesday. The conclusion of the mid-term elections might also result in a re-set of political pressures on the Fed.
A Republican takeover of Congress would render unlikely renewed aggressive fiscal stimulus in the context of a gridlocked Washington. It might also cause the Biden administration to focus less on fighting inflation and more on easing monetary policy in an environment where there will be growing focus on a weakening economy and the fact that fiscal policy will be constrained,” said Wood.
Focus on Pakistan:
Wood believes that the most attractive feature of the Pakistan stock market right now is low valuations and high dividend yields, given the current stressed macro environment, both politically and financially.
The MSCI Pakistan Index is on 3.7x forecast 2023 earnings and a 2023 forecast dividend yield of 10.2%. The country was not in danger of imminent default as was feared a few months ago. The private-sector external debt totalled only $11.6 billion or 3.1% of GDP at the end of June 2022.
A pressing short-term issue in Pakistan, with foreign exchange reserves down to only $7.44 billion, is avoiding a balance of payments crisis.
“The crowding out of the private sector by government borrowings means a lack of risk-taking on the part of a banking system which continues to make easy money funding the government with 10-year government paper paying 12.9% yield. The government remains the big borrower with total government debt equivalent to 73% of GDP. Still a compensating factor is that most of the dollar debt is multilateral in nature,” said Wood.