Weekly market recap: Tesla trips

UK equities are among the strongest performers, as a falling pound boosts the value of exports in the FTSE 100.

FacebooktwitterlinkedinmailFacebooktwitterlinkedinmail   by Tertius Bonnin, 11th September 2020

With the number of staycations currently going on as people avoid air travel, it’s no surprise that we’ve now been blessed with the seventh ‘official’ sighting of the Loch Ness Monster this year! In the classic style, we’re pleased to report that tourist was using an extremely poor quality camera phone and that our poor unphotogenic friend Nessie remains as elusive as ever…

As new developments in the Brexit saga intensified, the pound dropped like a stone last week versus its international peers. Asset class returns are below; in local currency terms, UK equities were among the strongest performers as a falling pound boosted the value of exports in the FTSE 100.

Figure 1: Asset class total returns, local currency

Source: Bloomberg, EQ Investors

Figure 2: Asset class total returns, GBP currency

Source: Bloomberg, EQ Investors

US Technology firms continued to see share prices fall in the deepest market rout since the March as the correction spilled into its second week. With Technology firms making up a large proportion of the US stock market (particularly following the stellar year-to-date performance), the S&P 500 is increasingly less insulated from negative price action in this narrow segment of the market. This is particularly visible in the tables above with the US significantly underperforming its Technology-light European peers. Looking further afield, we note that collectively Technology and other Growth-orientated companies have now lost over $2.4 trillion in market cap since their recent highs, which is equivalent to 1.15x the entire FTSE 100. Nevertheless, it is likely to take significantly more than two weeks for US, Technology or Growth-orientated businesses to undo years of outperformance.

 

Figure 3: US vs Europe, Growth vs Value, and Technology vs Financials (or other economically sensitive sectors) appear to be different versions of the same trade in which companies whose growth rates are detached from economic fundamentals are highly sought after
Source: Bloomberg, EQ Investors

 

Though not a contributor (or indeed a detractor) to overall index performance, one of the biggest talking points in recent weeks has been whether Tesla, the electric vehicle manufacturer, would be included within the S&P 500 index. This is important for Tesla shareholders as mutual funds and ETFs replicating the index, representing hundreds of billions (if not trillions of dollars), would be required to buy shares in the car company on its addition to the index. But with the news breaking that the committee responsible for the S&P 500’s construction had omitted Tesla, its shares retraced an earlier gain that was caused by the anticipation of its inclusion. Nevertheless, even without Tesla in its ranks the S&P 500 remains one of the most highly innovative and technology heavy indices in the world.

 

Figure 4: After announcing it would not be added to the S&P 500, Tesla shares fell giving up earlier gains caused by the anticipation of its inclusion Figure 5: Even without Tesla, the S&P 500 contains some of the most highly innovative companies in the world as it is dominated by companies in the Technology sector
Source: Bloomberg, EQ Investors Source: Bloomberg, EQ Investors

 

As we indicated above, the US has over the years been a breeding ground for companies like Tesla that are Growth-orientated and benefit from a secular tailwind. By comparison, Europe has failed to incubate any serious global leaders of its own in this area, with its mature markets dominated by ‘old economy’ sectors such as Financials (Banks) or commodity-related businesses (Mining and Energy). As such, we should not be surprised if the divergence between the two regions continues to grow and the correlations continue to fall.

STAT OF THE WEEK: 13% – the proportion of the world’s population who do not have access to electricity (Our World in Data).

DATA CORRECT AS AT: 11/09    /2020

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About the author: Tertius Bonnin

Tertius joined EQ in 2016 and is responsible for covering investment ideas within US, Global and Thematic equities. He sits on the fund selection committee and also supports the portfolio managers across a range of other responsibilities.

He passed Level I of the CFA exam in 2018, holds the Investment Management Certificate and has a BA in Business with Finance. He enjoys a variety of sports including skiing, cycling and running – and when not in the office he experiments with Asian cuisine.

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