Big tech sets tone for UK market, says HAMISH MCRAE

Big tech sets tone for UK market, says HAMISH MCRAE: US sentiment is the greatest driver of what happens here

This coming week is a big one for Wall Street, and that has big implications for us here. Three of the four most valuable companies in the US are reporting first quarter numbers: Microsoft, Amazon and Alphabet, the parent of Google. And Meta Platforms, owner of Facebook, is reporting too.

We have to wait another week to get results from Apple, the biggest of all by market cap, but these results will give us the justification – or not – of the recovery in the share prices of big-tech America.

You may remember the hoo-ha about Apple becoming the first company ever to be worth $3 trillion at the end of 2021. Its value then fell to around $2.2 trillion, wiping out a huge amount of wealth, but now it is back to more than $2.6 trillion.

Indeed, its shares are up by one third since the beginning of this year. Microsoft is up nearly 20 per cent, Amazon 21 per cent, and Alphabet 18 per cent. Can the recovery be sustained?

This matters a lot for UK and European markets, for American investor sentiment is probably the greatest single driver of what happens here.

Crucial: This coming week is a big one for Wall Street, and that has big implications for us here

There was an intriguing example of both the power and the limits of big money last month. At the peak of the scare about European banks, the demise of Credit Suisse and all that, global funds short-sold a swathe of European bank shares. Reuters reports that they made a profit of £2.2 billion in March from these sales. But so far this month, calculations by analytics firm Ortex suggests that they lost £805 million as share prices recovered.

The reaction of most of us will be that that serves them right, and it’s a shame that they haven’t lost even more. But once we have got over our schadenfreude, consider this. That rout of bank share prices, made worse by the short-sellers, was actually a great opportunity for value investors seeking to buy into solid financial institutions at bargain-basement prices.

Shares of the Italian banking group, Unicredit, have risen 35 per cent since then to their highest since 2016. Barclays shares took a real hammering, falling from a high of just under 190p in early February to 134p in late March. Now they are back over 150p, which puts them on a price/earnings ratio of just over 5.1 and a dividend yield of 4.75 per cent.

The shares have over the past couple of decades been a weak performer, and banking remains a deeply unfashionable sector. But that p/e ratio says either some really bad news is round the corner, or they are very cheap. Lloyds and NatWest are on p/e ratios of 6.8 and 7.6, almost as lowly-rated.

The point here is not to urge anyone to get into bank shares. Rather it is to point out that the idea of value investing is still in the doghouse. For what it is worth, the Nasdaq index of high-tech US companies is up 16 per cent so far this year (though well down from its November 2021 peak), whereas the Footsie is up only 5 per cent (though only 100 or so points from its peak last February).

So come this week, let’s look for two things. One will be some sort of indication as to whether the recovery in sentiment about big tech America is intact.

How are earnings, and what do the giants say about trading conditions? There is something near a consensus now that the US will experience a mild recession later this year, so the outlook about future demand may be more important than the results for the first quarter. We may have to wait another week and get a further steer from Apple but we are moving to some sort of clarity.

The other thing is what happens here. We are into the reporting season and my impression is that some decent results will make UK institutions wonder whether they have been really so clever shovelling all their savers’ money overseas or into gilts.

More pertinently, is that what their clients saving for a pension want them to do?

If private equity firms can see value and make bids for UK enterprises, how long till UK institutional investors get the message? But shifts in sentiment almost always happen achingly slowly and this is no exception.

What is beyond dispute is that this is a crucial period coming up, when investors on both sides of the Atlantic will be seeking direction as to those two eternal questions. Should this summer be one for equities or fixed-interest? And if you are going for equities, which to some extent you have to, is it value or growth?

My instinct is equities and value, but let’s see if the professionals agree.