GVA Research on Bloomberg Radio’s “Taking Stock”: FANG Outlook for 2016

Today I joined Kathleen Hays and Pimm Fox on Bloomberg Radio to discuss the outlook for 2016, and how this week’s events will impact stock picks for 2016.

Tech – Buying Opportunity Potential Limited By Currency War Prospects:

Off the back of reassuring developments (e.g. positive U.S. Dec 2015 employment report, China limiting insider sales and scrapping circuit breakers), the burgeoning panic permeating the markets since the start of 2016 trading has momentarily dissipated and the tech sector is leading the market advance (XLK $40.71, +0.74%). The question for investors is whether they should “buy the dip”. With the strong open fading, looks as if investors are opting instead to “sell the bounce”. With the Federal Reserve likely to continue monetary tightening off improving U.S employment trends, look for the U.S. dollar to remain strong. Meanwhile, with China having to allow market forces greater determination of the value of the Renminbi following it’s inclusion in the IMF SDR currency basket, the prospect for further currency depreciation is high. The knock-on effects will be capital market instability and capital flight from China. For sectors with a relatively high portion of non-U.S. dollar denominated revenues such as technology, the likelihood of competitive currency devaluations in Asia should keep investors cautious, especially as foreign exchange hedges limiting the effect of the strong U.S. dollar are running off. That said, it is too soon to buy, but not too soon to trade. The 2016 modus operandi won’t be “buy the dips”, but instead “wait for the drops”.

Tech – 4Q15 Earnings Season Likely To Offer Another Bounce:

With December 2015 quarterly reports coming shortly, there is the potential for a tech stock bounce as expectations tend to be trimmed heading into actual reports. Nevertheless, the flow of negative pre-announcements from Apple (AAPL) suppliers (e.g. Cirrus Logic (CRUS), Qorvo (QRVO)) raises fears the slowdown may be more than just a pause in advance of the expected introduction of the iPhone7 in September 2016. Note that iPhone sales in China were the source of AAPL outperforming September 2015 expectations. With heightened uncertainty as to China’s economy, investor confidence has been shaken in the strength of the Chinese consumer to purchase the premium product the iPhone represents. Investors should focus on the fact that product cycles generally bolster AAPL stock returns, so here is a stock price pullback to pay attention to. Away from AAPL, tech sector trends away from smartphone penetration remain intact with online advertising, social networks, cloud computing and cybersecurity areas of focus. To that end, Amazon (AMZN), Facebook (FB), Alphabet (GOOGL) and Netflix (NFLX) may be traded ahead of the coming results.

Tech – Secular Growth Supports Sector’s 2016 Performance Prospects, But Rising Rates Favor Total Return Names:

The technology sector provided an above-average 2015 return, but was not the market leader as the consumer discretionary sector was lifted by employment gains coupled with the positive consumption effects of lower oil prices. For 2016, the technology sector will continue to be well-positioned with stronger secular growth prospects than the broader economy due to positive trends in cloud computing, smartphone penetration and social media adoption. However, in 2015 with interest rates low, shares of high growth/low profit companies received high valuations. Companies such as Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL), popularly known collectively referred to as “FANG”, benefitted as monetary conditions supported high duration investments and led the sector higher. Now, with U.S. monetary policy tightening in 2016, investors may shift their focus towards tech sector names well-aligned with underlying secular growth trends but offer investors total return through dividend payments and are thus lower duration investments. Consequently, companies such as Apple (AAPL), Intel (INTC), Microsoft (MSFT) and Nokia (NOK) should outperform. Away from changing monetary conditions, slowing global economic growth and negative foreign currency effects (i.e. strong US dollar), tech sector performance may be dampened to extent late-stage companies pursue IPO exits over course of 2016.