The simplistic ‘Trumpflation’ trade has now almost fully reversed as expected in December when we suggested a non-consensus overweight in global tech, with the USD back at pre-election levels mid surreal chaos at the White House. The growing dysfunction in Washington has been offset by the broadly positive tone to Q1 corporate results as well as political tail risks in Europe receding until the Italian election next year – global earnings momentum continues to be led by Europe, Japan and HK/China while India was the weakest major market yet again in April and its re-rating looks unjustified.
Since late Q4, we’ve seen a steady value into growth rotation, as tech has become the biggest global overweight bet on institutional positioning surveys (notably in EM where active fund tech allocations have now overtaken financials) followed by banks (notably Eurozone, which have substantially outperformed US YTD) while defensives are being shunned.
Tech has now become a momentum trade, although parallels to 1999/2000 are (with a handful of exceptions) unjustified, in that rising earnings expectations have broadly underpinned soaring stock prices as nearly every leading global web and hardware name has beaten (rising) consensus expectations, from Nvidia to Tencent. Investors and sell side analysts back in Q4 underestimated scale/aggregation effects for the global internet names and the strength of the demand/pricing environment for semiconductors, and underweight funds have had to close bearish bets.
A longstanding theme is that we’re seeing an explosion in tech innovation driven by ever cheaper data collection/analysis and that aggregate market earnings power will increasingly concentrate in this sector. That’s reflected in the S&P 500 IT sector forward margin on consensus IBES data reaching more than double that of rest of the market (9.7% vs. over 20%). From the 2009 trough at about 9%, the IT sector has seen a spectacular level of margin expansion, as well as revenue growth (over 10% forecast this year vs. 3.5% ex IT).
US equity margins ex IT remain well below pre-crisis trend and the tech weighting now at 22% as much as relative risk asset inflows explains much of US equity outperformance in recent years versus Europe/Japan. Nonetheless, the overall tech sector has moved from a consensus underweight to overweight since December while the risk of a deeper than expected Chinese slowdown in H2 amid signs that pricing in more commodity chip markets like DRAM is now peaking suggest it’s time to be much more selective. The growing popular pushback against perceived monopolistic Silicon Valley economic ‘rent seeking’ and corporate tax arbitrage is also becoming a medium-term risk.
The tech smartphone supply chain in Taiwan has seen a notable recent deterioration in analyst estimates, dragging the overall index revisions ratio negative. I’d expect memory chip names to see similar downgrades this month and next. The easy money has been made in the overweight Asian tech hardware trade which was a suggested allocation in Q4 and we would now be taking profits and reallocating toward unloved energy and rate sensitives.