April 2023

Insights

The Good: Tremendous Tech

Microsoft opened the Q1 tech earnings seasons with a 9% price move in extended trading after they reported strong beats on both the revenue and earnings lines. Continued weakness in their Personal Computing segment (-9%) was largely expected, with research firm Gartner estimating that PC shipments dropped 30% during the quarter. However despite this, resilient performances from Cloud (+16%) and Productivity/Business Process (+11%) drove total company sales growth of 7%.

 

Source: Financial Times

Although segment results were largely in line with expectations, Alphabet rose 4% after their first top and bottom line beat in four quarters gave hope that the digital advertising slump might finally be abating. The company has been grappling with slowing revenue growth in recent times as businesses have reigned in marketing budgets to combat rising operating expenses. Although management were quick to point out that “the outlook remains uncertain”, their authorisation of a $70bn share buyback indicates their confidence in a recovery in the long term.

Meta surged 14% on the back of a return to growth as users continued to flock to their family of apps. The company surpassed expectations for revenue for the quarter by a significant $1bn, and improvements to their targeted ads business continued to show as they strongly beat estimates for average revenue per user. Their significant investment in AI has been the primary driver of this, as machine learning models have largely replaced the ‘easy data’ that until 2021 was offered up freely by Apple devices. CEO Mark Zuckerberg also highlighted the company’s growing efficiency.

Amazon initially surged 12% on strong Q1 numbers but pared gains due to concerns about future weakness in cloud growth. Although their Advertising business continues to impress and they are making strides in optimising Stores and Fulfilment, the highly profitable Cloud segment continues to be the primary focus for investors. Management indicated that in this difficult economic environment, Cloud customers are choosing to optimise their data centre usage which results in a slowdown for AWS. Amazon, for their part, are actively helping customers in this endeavour; much like in the past, they are choosing to sacrifice short-term profits in exchange for long-term loyalty.

Microsoft, Alphabet, Meta and Amazon are large holdings across High Street funds.

The Bad: First Republic not the first…nor the last?

US regional bank, First Republic, became the most recent victim of the current banking crisis after US regulators seized the ailing lender and struck a deal to sell the bulk of its operations to JP Morgan. The bank becomes the second biggest banking failure in US history, behind only the collapse of Washington Mutual Inc in 2008. First Republic was known for its unique strategy of gathering extremely wealthy clients by offering excellent customer service, paying them minimal interest and then using their deposits to loan individuals extraordinary sums of money to buy property (mortgages).

 

 

Source: The Financial Times

The saga played out as follows: The US Federal Reserve’s rapid interest rate increases resulted in both treasuries and the money market offering attractive yields for the first time in many years. As a result, in February First Republic’s customers started pulling money out of their accounts as they began to seek better returns elsewhere. To try stem the tide the bank offered higher rates on deposits. This meant they were paying more to keep customers money, just when rising rates were pummelling the value of its mortgage portfolio. The March bank run then followed, and in just a few days First Republic lost more than half of its deposits, around $100 billion. In mid-March a group of large US banks then injected $30 billion into the bank, in an effort to save it. However, the bank’s troubles proved too large, and it could no longer meet depositor withdrawals. And so, the regulators had to step in.

First Republic becomes the third seizure of a bank by US regulators since March, with peers Silicon Valley Bank and Signature Bank having already been rescued after going under. What these three had in common was a business model that did not adapt well to rising interest rates. First Republic’s demise has brought back investors questions of who’s next, and along with that the fear of market contagion as further banking events threaten to constrain credit and exacerbate the economic slowdown.

Several prominent investors have predicted aftershocks following the recent turmoil, arguing that banks could be forced to comply with tougher regulations. This would hamper their ability to lend to a US economy which is just starting to feel the effect of the Fed’s aggressive policy. While High Street funds have very limited exposure to the banking sector, such aftershocks could add to an already strained economic environment and further tighten financial conditions.

& Providing offshore exposure in an uncertain South Africa

In recent weeks, High Street Asset Management was featured on two podcasts where we profiled AMC002, our recently listed Actively Managed Certificate on the JSE. During the two sessions, we discussed the strategy and rationale for the Product with Simon Brown and Nerina Visser. The product’s strategy of investing in defensive companies with high dividend yields and who buy back large amounts of stock has been well received by our client base and the Product is gaining traction. We invite you to listen to the podcasts which are linked below and should you have any further questions, please don’t hesitate to get hold of us.

 

Source: High Street Asset Management

© High Street Asset Management (Pty) Ltd. All rights reserved | FSP No. 45210 | Legal