What a way to begin the new year, with strong market gains all round and the FTSE 100 passing the 7500 mark for the first time since the pandemic. Notable and encouraging as that start was, there’s a lot of catching up to do. Apple’s share price has risen almost 150 per cent since the start of 2020, and the tech star has now become the first company to reach a market value of $3tn (£2.2tn). It’s a huge success for chief executive Tim Cook, but what does the event tell us about the way ahead for stock markets?
Is Apple’s $3tn value proof that some sectors are in bubble territory, with believer-investors disregarding the risks from inflation, supply chain problems and regulators on the prowl? It faces stiff competition in certain areas: as noted by AJ Bell, Apple is locked in a “fierce fight for customer wallets in entertainment, where Netflix, Amazon, Disney and others are driving up the cost of acquired content and spending heavily on developing their own programming for good measure”.
But many analysts remain bullish on Apple’s prospects. If you look at the numbers, it’s easy to glide over the risks. It’s got 745m subscribers to its high-margin services alone, and made $365bn in sales in the year to September 2021 – an annual gain of 33 per cent. And it’s moving into exciting new markets (cars and virtual reality among them). Whatever the risks posed to hyper-growth company valuations as we move from living with a pandemic to living with inflation, and as markets are weaned off years of artificial stimulus, quality tech stocks generating piles of cash will continue to have a place in portfolios.
Still, Morgan Stanley Research’s conclusion is to underweight US stocks to account for high valuations, more catch-up potential and less volatility elsewhere in the world. Other market-watchers remain positive on the US outlook, but warn that the upside is likely to be lower than in previous years. There may be good diversification opportunities too in the US small-cap segment, as Dave Baxter outlines here.
Should you underweight or overweight the UK? Some analysts are predicting the FTSE will end the year closer to 8,000 – with the UK’s undervalued qualities drawing in more investors and its high proportion of cyclical stocks meaning it could benefit from an economic rebound. Sue Noffke at Schroders comments that UK shares remain cheap because of the perceived significant political and economic risks of Brexit, which continue to linger and depress the valuation of the UK stock market. The extent of this valuation discount is completely unwarranted, she argues, with scope for even some of the old-economy businesses to reinvent themselves: “With regards to Shell and BP, we believe they can be part of the solution amid urgent efforts to reduce greenhouse gas emissions to head off unchecked global warming.”
But there are headwinds here, too. Inflationary price hikes and higher energy and tax bills (from April) could dampen consumer spending. The Institute of Directors reports rising gloominess among its members about the UK’s economic prospects, which no doubt reflects Omicron and Brexit worries.
For both the US and the UK the level and duration of inflation are crucial. The risks are twofold: that high and persistent inflation will erode confidence as business costs and debt payments rise and that central banks will react even more aggressively if inflation appears to be unyielding, inducing in the process a classic stagflation scenario.
It’s hard to find consensus. Central banks and some asset managers stick to the view that inflation will fall later on in 2022. But analyst Steve Clapham thinks inflation is here to stay; Chris Dillow is sure it’s going to fall. BlackRock sees inflation settling at levels higher than pre-Covid whenever the supply bottlenecks ease and “persisting for years to come”.
This mix of factors and views explains why the predicted range of outcomes for major markets in 2022 appear broader than they have been for years
- Simon Thompson will return to these pages next week, with his regular column and a feature on the secrets to successful investing.