Tech Speed Bump

Originally published by BetaShares

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Global Review & Outlook

• Last week was fairly mixed for global stocks, with the shock UK election result denting sentiment a little, though there was some relief after ex-FBI head Comey failed to deliver the "smoking gun" evidence against President Trump that markets had feared. While the risk of impeachment seems as remote as ever, the Russia links inquiry will linger and could still hinder Trump's ability to refocus on fiscal stimulus.

• Yet although the US S&P 500 only dropped 0.3% last week, there was a bigger prang in the tech sector with the Nasdaq 100 down 2.4% (all on Friday), after Goldman Sachs (NYSE:GS) warned momentum into the tech "FANG" darlings risked getting a little too strong. Of note is that a larger than usual share of US stock strength these days is driven by the tech giants. I'd note, however, the Nasdaq-100's price-to-forward earnings ratio at end-May was 20.3 - or broadly in line with its average since 2003, and way below the average of 44 over 1998 and 1999. Tech stocks are strong for a reason - that's where the earnings are!

• China's monthly "data dump" today is the major global data highlight this week. Otherwise, the key event will be the near-certain decision by the US Federal Reserve to raise rates again following its Tuesday/Wednesday meeting. As always, the key will be the post-meeting Fed Statement - if the Fed hints at a pause in rates for a while (i.e. only one further move this year and closer to Xmas), equity and bond markets could react positively - though not the US dollar!

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Australian Review & Outlook

• The S&P/ASX 200 again lagged global markets last week, with further weakness in iron ore prices and the soft 0.3% Q1 GDP growth unnerving sentiment. The RBA's still upbeat post-meeting Statement (in which it left rates again unchanged) did little to boost flagging investor spirits. Indeed, a growing array of analysts (myself included) suspect the RBA remains simply too optimistic on the economy.

• That said, we'll learn more when the National Australia Bank's May business survey is released today. Business sentiment has been surprisingly bullish in recent months, and the question remains whether this positivity will help lift up the still soggy "hard data" such as GDP or be dragged down by it. Thursday's employment report will also be telling, as we'll get the quarterly update on the current still quite elevated level of "underemployment" - i.e. those that are either unemployed or working fewer hours than they would like.

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The Wrap

• Despite all the usual risk factors than can be cited, the bottom-line reality is that the global economy is enjoying a period of good growth (which is also broadening to Europe/Japan) and continued persistent low inflation. Against this backdrop, it's hard to be super negative on equity markets, even though outright price-earnings valuations are at above-average levels and earnings growth is still a little patchy. Good growth and low inflation is reflected in continued gains in equity markets even though bond yields and the US dollar have retreated so far this year after the Trump euphoria of late 2016. In turn, and despite last week's "speed bump", such an environment favours the tech heavy Nasdaq especially, and some catch-up performance in Europe and Japan. Meanwhile, sectors that stand to most benefit from rising bond yields - such as global banks - are biding their time.

• Closer to home, local fundamentals don't appear as bright (which is just as well ETFs now make it easier to invest oversea!). Indeed, the market is again flirting with the idea of an RBA rate cut, especially if decent signs of slowing in the Sydney and Melbourne property markets emerge. As a result yield, rather than growth, investment themes are likely to remain favoured locally - which will tend to favour financials (over say, bond proxies like listed property) if longer-term bond yields do eventually start to rise.

Have a great week!