Weekly View – new headwinds

The CIO office’s view of the week ahead.

Apple made headlines for being the first company to reach a market capitalisation of USD 1 trillion. This milestone highlights two key points about the technology sector, in particular the FAANGs (Facebook, Apple, Amazon, Netflix, Google) which dominate it. Apple and Amazon’s continued success stems from their highly diversified business, which makes them less dependent on narrow revenue sources. Meanwhile, advertising-driven Facebook and Google and subscription-based Netflix have trailed behind. This shows that the FAANGs should not be considered as a single homogeneous group, but rather as business models that are impacted by various cycles, with those with more diversified businesses being less vulnerable to these variabilities. The second notable observation is that these companies can continue to justify their high share prices with strong earnings growth despite their size. We are neutral on the tech sector as risks on regulation and a potential spread of the trade dispute to the technology stocks remains.

Global bond markets were impacted by the BoJ’s decision to increase flexibility around its 10-year bond yield, allowing it to rise moderately. Yield curves around the world steepened, revealing the anchor role Japan has played for the yield curves of other developed economies. Credit risk, which has been subdued over the last decade, shows signs of resurfacing and is an area to monitor. While the rise in global bond yields is an important factor affecting global market valuations, earnings growth remains healthy, as demonstrated by the latest quarterly results.

Chinese equities were last week’s worst performers as trade tensions with the US remain elevated despite no concrete decisions being made. Meanwhile, Italy reintroduced the prospect of sovereign credit risk with the announcement from members of its government that the 2019 budget discussions have started and so far are not consistent with Brussels’ numbers. Italian spreads widened as a result as European bank shares declined. China and Italy remain immediate challenges for markets.

Alexandre Tavazzi, Head of CIO office, Pictet Wealth Management

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