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February global market commentary: Global markets recover from a slow start to 2021/ Intel

04 March 2021

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by Peter Little/Henry Biddlecombe, Fund Management

Developed markets (DMs) bounced back (MSCI World 2.6% MoM for February) from a slow start to the year, led by a recovery in cyclical stocks in anticipation of a vaccine-induced economic normalisation. COVID-19 vaccinations continued at pace in DMs in February, with c. 140mn vaccinations being administered globally during the month to bring total worldwide vaccinations to c. 240mn as COVID-19 deaths globally dropped by c. 25% MoM to 300,000.

The price of Brent crude oil has rallied over 50% since news of vaccines first broke in November 2020, including an 18% rally in February as improving demand prospects coincided with an unprecedented arctic blast shutting about 40% of US oil production and Siberian frosts limiting Russia’s output. The S&P 500 energy sector was comfortably the best-performing sector in February (+22.7% MoM) off the back of the rally in oil. The Brazilian stock market would typically benefit from a higher oil price, with state-controlled energy company Petrobras the biggest component of the Brazilian Bovespa stock index. Unfortunately, however, populist political intervention on the part of President Jair Bolsonaro, who fired the Petrobras CEO for raising fuel prices, resulted in Petrobras’ share price dropping by c. 18% MoM as the Bovespa fell 4.4% MoM, making it comfortably the worst-performing major emerging market (EM) stock market for February and resulting in the MSCI EM Index (+0.8% MoM) underperforming DM shares for the first time in three months. Chinese stocks were also relative underperformers in February, particularly amongst some of the large-cap tech counters (Alibaba -6.3% MoM, Meituan -4.5% MoM, Tencent -2.8% and Netease -4.5% MoM). Other EMs fared relatively well, including India (+6.7% MoM), Russia (+2.5% MoM), and South Africa (+5.3% MoM).

S&P 500 companies largely wrapped up reporting of 4Q20 earnings during February, with 95% of companies having reported by month-end. Companies recorded aggregate earnings growth of 5%, relative to 4Q19 (the last pre-COVID quarter), with earnings 18% ahead of some very low expectations. S&P 500 earnings for 2021 are now expected to be about 40% ahead of 2020 (which was heavily affected by COVID-19) and 13% higher than 2019 earnings (the last pre-COVID-19 year).

Perhaps the most alarming move for the month was from US government bonds as US 10-year government bond yields ended the month 0.35% higher at 1.4%, having briefly touched 1.6% during the month. That was the biggest monthly spike in US government bond yields since late 2016, when yields rallied in response to the election of former US President Donald Trump and it is also the first time that US 10-year bond yields were above 1% since the start of the pandemic. The advent of a healthier yield environment for banks combined with the prospect of a cyclical economic recovery to drive the S&P 500 financials sector 11.5% higher in February.

Intel: Several positive catalysts at play

By Henry Biddlecombe, Fund Management

As has been the case with many of the older, larger incumbent technology giants – Intel has been left behind as computing migrated to mobile devices and new-generation data centres. A supremely dominant force in desktop and semi-mobile computing (laptops), Intel failed to leverage its leading engineering prowess in a market where cell phones and GPU-centric servers would address the world’s growing need for data and interconnectedness. Companies such as Nvidia and AMD have led the charge, while Intel has arguably been left distracted with defending its dominant market position in the legacy chip markets.

The valuation of Intel’s stock now reflects these strategic missteps, which at US$60/share trades at roughly 10x the company’s communicated earnings guidance for FY23. In our view, this likely presents an opportunity.

Apart from the valuation underpin, there are now several positive catalysts at play. Well-known activist investor Dan Loeb of Third Point, and Seth Klarman of the Baupost Group, have both recently accumulated significant stakes in the company with the intention of righting its strategic direction. There is already evidence of progress on this front, with CEO Bob Swan being replaced with former VMware chief executive Pat Gelsinger.

We believe that over the next few months, Gelsinger will communicate an improved strategy that will address the new key markets that Intel has neglected up until now. The market will likely grant him the benefit of the doubt, and the share could rerate on the back of this renewed optimism. Given the suppressed valuation, the share only needs to go from 10x 2023 earnings to 15x 2023 earnings to deliver a 50% return from current levels (3 March). We also believe there is very limited downside from the current share price (c. US$60). Hence, this scenario presents a very positively skewed, risk-reward scenario, and warrants inclusion across our global equity mandates.

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