US TECH STOCKS LEAD GLOBAL EQUITY MARKETS LOWER BUT SENTIMENT TOWARDS THE UK IMPROVES

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Data Sourced from FE Analytics, and Bloomberg Finance LP

US TECH STOCKS LEAD GLOBAL EQUITY MARKETS LOWER BUT SENTIMENT TOWARDS THE UK IMPROVES

This week the big headlines were from the tech sell-off in the US markets that dragged down global equity markets. The big run up in tech stocks over the last two years and the small number of firms driving performance of the broad market means some investors are questioning whether current valuations are sustainable, so anything that appears to undermine those high valuations is causing volatility. If there is further bad news and more firms fall short of expectations there may be further bouts of volatility.

But behind the headlines there is better news. US GDP growth exceeded expectations in the second quarter and UK economic activity continues to improve. Although US large caps stocks have come under pressure, smaller companies in the US and the broad UK market have been holding up fairly well. The arrival of the new Labour government has given big investors a reason to re-examine the case for investing in the UK and many are finding reasons to be more positive.

US: TECH STOCKS DECLINE AS TESLA AND ALPHABET FALL SHORT

US tech stocks led global markets down as updates from two of the Magnificent Seven US tech giants fell short of expectations. Tesla has been cutting prices to defend market share and it said higher costs are further dragging on profits. Its shares fell 12% as it announced a delay to its self-driving taxi business. Alphabet’s revenues increased 14% and beat analysts’ estimates, but shares fell 5% as investors were concerned about the cost of more investment in artificial intelligence. The caution about AI stocks also dragged down semiconductor stocks as broad US and global markets fell.

Joe Biden’s decision to drop out of the presidential election caused markets to revisit some assumptions. Donald Trump’s recent lead in the polls has pushed up the yield on longer-dated government bonds as another Trump presidency is expected to mean higher inflation and higher long-term interest rates. But the strong backing for Kamala Harris as the Democrats’ candidate caused yields on longer-dated bonds to fall back slightly.

UK: SIGNS OF STRONGER GROWTH AS INVESTOR TURN MORE POSITIVE

There are further signs of economic improvement for the UK as activity in the services and manufacturing sectors increased in June. The improvement in the UK’s Purchasing Managers Index stood in sharp contrast to Europe where declining manufacturing output in France and lower services and manufacturing in Germany dragged down the overall European rate. Signs of UK growth and improving consumer sentiment add to arguments in favour of the Bank of England keeping rates high and this may help sterling continue to rise as some commentators tip the dollar to weaken to $1.35 against the pound.

After a number of years of very short-term political decision making, the Labour government’s big majority in parliament has given investors some political stability and large asset managers have become more positive about the UK. Although UK equities remain the least popular sector with retail investors, institutional investors including Allianz, BlackRock and Rathbones have been increasing exposure to UK equities.

EQUITIES: AIRLINES FACE LOWER FARES AND SLOWING DEMAND

Airline stocks have fallen sharply after signs that the post-pandemic travel boom is running out of steam. Ryanair’s profits fell 46% to 360m euros in the three months to June as fares fell 15%. It warned that demand is slowing and predicted fares will fall further over the summer and this sparked a sell-off in airline shares with Ryanair falling 16%, and easyJet and Wizz Air down 8.5% and 13% respectively. This is despite easyJet reporting profits rising 16% in its last three months and average fares almost unchanged.

Although transatlantic routes remains busy, many north American airlines are also dealing with the slowdown in air travel. After several years of bumper demand airlines have significantly increased capacity as people returned to travel after the Covid pandemic and Airbus warned that it is currently unable to fully meet demand for new planes. But airlines including Lufthansa, Air Canada and US budget carrier Spirit Airlines have all recently warned of falling revenues.

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