What's Moving Markets in November?
- Contrary to market reaction, this earning season has not been poor for stocks within the Ecommerce portfolio. Reported sales growth was broadly in line with consensus expectations (missing by only 0.6%) while earnings beat by 12.9% percentage points.
- The average sales and earnings growth of the companies within the portfolio was +22.7% and +32.3% respectively, showing robust fundamentals in regards to both sales and profit.
Despite comparatively solid earnings, investor sentiment has taken a downturn. This can be explained by a number of factors which are weighing on perceptions of the Ecommerce sector. They include:
- The semi-conductor sector feeling pressure as Apple lowers its orders, and Nvidia is no longer benefiting from a craze in bitcoin mining
- US-China trade war concerns, and its effects on Chinese growth
- The widely predicted and expected raising of US interest rates
- Increased international regulatory pressure on certain large technology players
- Heightened perception of geopolitical risk, including: President Trump, Saudi Arabia, Iranian Sanctions, Italian budget, and Brexit
Each of the above reasons, excepting interest rate increases, affects a different part of the Ecommerce sector; but, taken together, they have caused a rotation out of the whole. The simple explanation is that the constant release of negative headlines, even as many companies report solid earnings, has turned sentiment for the sector negative.
While this pullback has occurred across the whole market, the growth sectors have been disproportionally affected (and most notably technology). In previous analyses and newsletters, we have looked at recent pull backs in the Ecommerce and Technology sectors. However, the current correction has behaved differently being larger in magnitude and longer in duration. Thus, we must look further back to find parallels.
At the start of 2016 we can observe a correction of similar magnitude and duration: a peak-to-trough decline in the MSCI World and NASDAQ of -14.5% and -17.3%, respectively, over a more-than two month-duration from the end November 2015 through to February 2016. Notably, we can also observe a rotation away from growth stocks and the technology sector during this period. This pullback was driven by fears around the growth of the Chinese economy (specifically trade data), and oil and commodity price slumps. A year after the correction, the MSCI World and NASDQ indices had appreciated by 23.5% and 34.4%, respectively.
If we look at the market valuation for the technology sector (using NASDAQ as a proxy), we can conclude fairly comfortably that it does not look onerous: the MSCI world and NASDAQ indices are now well below their 3-year average Price to Earnings (PE) ratio.
MSCI World Index average 3-year PE ratio
NASDAQ Composite Index average 3-year PE ratio
We see a similar case in point in the Global Trends Ecommerce Portfolio, where the average PE ratio is some 16.5% below where it was at the turn of the year – even as the portfolio has average sales and earnings forecast growth of 19.5% and 20.6%. Global Trends Consumer and Managed are trading at a 20.9% and 12.7% discount, respectively.
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