How expensive are your tech stocks?

00:00:00: Hi and welcome to Swisscodes, daily market talk.

00:00:03: It's Wednesday, the nineteenth of August.

00:00:05: rising Middle East tensions are pressuring oil prices and global bond yields higher these days hence putting pressure on equity valuations around the globe.

00:00:15: Technology stocks lead losses in the latest selloff as sovereign yields make their return rate less attractive and sometimes not attractive at all.

00:00:23: So I will dial into how expensive global technology stocks have become compared to each other, but before i do please keep in mind that opinions are my own.

00:00:47: First things first, the main market driver since Monday this week is a rising Middle East tensions.

00:00:52: that pressure oil prices and global bond yields higher in expectation of rising inflationary pressures due to higher energy prices.

00:01:01: And the latter is waiting on equity valuations across the globe.

00:01:05: On Tuesday, for example.

00:01:06: The

00:01:06: U.S.'s

00:01:06: ten-year yield hit the highest level since January of Equities on both sides of the Atlantic Ocean.

00:01:19: hands pulled back, with S&P five hundred and stocks six-hundred in the seas declining around point seventy percent while NASDAQ hundred led losses within one point.

00:01:29: sixty eight per cent selloff during this session.

00:01:32: And Van Ag's semi conductor ETF fell round four percent.

00:01:36: This morning Nikkei is following the Western Peers lower While The Korean Cosplay Index is down by more than five percent at a time.

00:01:43: I'm talking here this morning.

00:01:45: Now moving forward The downside correction in equities will likely deepen if the geopolitical tensions remain tense.

00:01:51: Energy companies' stocks remain a good hedge against the Middle East.

00:01:54: flare-up and energy price let inflation risk, the cyclical and energy dependent European indices on the other hand are more sensitive to Energy prices than the technology heavy US peers.

00:02:07: So an interesting question today is whether the Technology Heavy US Indices will outperform during this new way of geopolitical jitters and heating energy prices or not?

00:02:18: And judging by yesterday's activity, this is not yet decays because NASDAQ hundred index fell significantly more than the other major US and European peers.

00:02:29: Yet if the rise in oil prices persists or accelerates, investors could eventually move funds toward technology companies.

00:02:38: This will happen in early weeks of the Iran War.

00:02:41: whether it happens again….

00:02:43: Well, possibly yes.

00:02:44: But it's just that the big technology companies are increasingly vulnerable to global macroeconomic picture more specifically to the interest rates because latest quarterly reports from the Big Technology Company show their free cash flow levels evaporated due to massive AI spending in a second quarter and later leaves these companies more sensitive costs as they will continue to spend big on AI infrastructure, but that spending will rely on debt.

00:03:13: Now this is not a new trend!

00:03:15: But the latest second quarter reports from the Big Technology companies confirm this trend and show that free cash flow levels were critically low or sometimes negative.

00:03:24: And while latter could maybe limit appetite when yields go up like it's today….

00:03:29: Indeed The Big Technologies corporate bond yields move parallel with US long-term yield.

00:03:34: when U.S ten year yield goes the US dollar denominated bond yields with similar maturity follow.

00:03:40: And well, that applies a negative pressure on their valuations when these stocks are priced to perfection.

00:03:47: now The good news is that perfection doesn't necessarily mean bubble.

00:03:50: bad news is it means expensive still all day index level as you doubt probably, the US equities' twelve-month forward PE ratios relative to past two decades now stand near top of historical range.

00:04:04: And moreover, the U.S.

00:04:06: equities both including and excluding the big technology companies today occupy the top two positions in terms how expensive these companies stock prices have become.

00:04:18: The US equity indices are followed by Japan Europe and very down the line we find EM stocks.

00:04:25: The latter, so the EM stock's twelve-month PE ratio stands below its historical ranges US indices to when you want point two times ratio according to a recent chart by Goldman Sachs.

00:04:41: That means that yes, the U S Indices, the?

00:04:44: u s technology indices especially are expensive today more expensive than the rest and it makes sense to diversify geographically as high valuations make them major us equities.

00:04:55: earnings yield less attractive relative to cheaper markets, where lower valuations leave more room RBC for multiple expansion and potentially offer better risk-revolving profile.

00:05:09: And that's not it!

00:05:10: US equities have become less attractive compared.

00:05:15: bonds for example sovereign bonds now as i can't for example has a forward p-e ratio of around twenty five giving it an earnings yield of around three point nine percent.

00:05:24: that's well below the roughly four point seven percent that you can get by allocating capital to the us ten year paper or around five point thirty percent yield that you.

00:05:37: That's one of the reasons why I don't think today that US major indices have a big potential on upside if U.S longer-term yields keep climbing.

00:05:46: The disrupted traffic in the Strait of Hormes may be underpriced by accrual oil prices, but the US ten year yield correlation with the number of ships across the strait is remarkable.

00:06:00: Of course transit data doesn't capture the entire situation as some ships reportedly go black to transit through the strait.

00:06:07: Yet, The prolonged war in the Middle East also means pressure on inflation at some point in time via higher energy prices when the Fed's policy outlook and its reaction function to inflation is no longer

00:06:22: straightforward.".

00:06:23: The latter will continue to pressure the longer maturity U.S.

00:06:25: yields higher than more military spending to keep this war going as another layer.

00:06:30: so something must gear.

00:06:32: Either the yields will come lower if Middle East tensions ease, for example.

00:06:36: or stock valuations should re-adjust.

00:06:38: But the global cross asset picture today makes little sense in allocating more in US equities.

00:06:44: What about other markets?

00:06:45: Earlier this week I have mentioned that Chinese yields are diverging from Western and Asian peers' big time.

00:06:51: China's struggle with property crisis, weak consumer metrics And also in fierce price wars among the big technology and other companies Are keeping economy on a verge of deflation That is pulling yield lower.

00:07:05: deals on the other hand are supportive of Chinese equity valuations, appetite being also boosted by excitement around AI related names.

00:07:13: Even players grappling with higher costs on top of destructive price wars that they're holding against each others and fears competition among domestic players.

00:07:22: Look again!

00:07:23: Shanghai technology heavy star-fifty index heavy in chinese chips & AI hardware rallied more than eighty percent since beginning this year after a sharp summer correction, but the star of fifties P ratio today stands near one hundred and fifty times.

00:07:41: And it has earnings yield off less than one percent making get not cheap at all compared to Western peers are not very appealing because the Chinese ten year yield stands.

00:07:53: In comparison, the Hansang Index which is heavy in China's big technology companies including Alibaba, Baidu and Tencent for example has a PE ratio of around twelve times.

00:08:04: And an earnings yield roughly eight percent.

00:08:07: Kaspia on other hand have forward PE ratio from seven to eight times making it cheaper though not less risky due high volatility for investors looking for discounted tech valuations around the globe with a forward earning yield standing between twelve to thirteen time.

00:08:23: And that's well above South Korea's ten year government bond.

00:08:26: That's yielding your four point forty percent.

00:08:28: today and elsewhere The situation is better than the US, the Japanese topics index for example has a five point nine percent earnings yield versus two point ninety percent For the ten-year JGB Yield whereas the Thai X Earnings Yield stands at around three and half percent Versus around one point nine per cent that Taiwan's Ten Year Government Bond yields today, implying an equity yield premium of about one and a half percentage points for the Taiwanese stocks.

00:08:54: So when you look at this picture what is clear?

00:08:56: that high volatility across technology valuations wherever you go and whatever price you pay for the technology stocks.

00:09:08: But looking at the valuations in returns, comparing them with what the lower risk government bond returns today The Asian Technology Stocks excluding Mainland China's SAR-Fifty offer a better value for the restaking by their investors than the expensive US and the Mainland Chinese pair.

00:09:26: So yes it does make sense to diversify even though It doesn't mean that You are going to be avoiding high volatility in technology stock which, when happens, happens in tandem with all of these markets.

00:09:36: So this is it for today!

00:09:38: I'm Ipeko Skardeshveja and thank you so much for joining me and thanks to all your beautiful and supportive comments.

00:09:45: This episode has been helpful but also insightful as well.

00:09:51: Please do not hesitate to leave your comments, reactions or questions below.

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00:10:15: So I will meet again tomorrow.

00:10:18: until then good day trading.

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