Banks are struggling, big tech earnings review, TikTok would be a scoop for Microsoft Banks are struggling, big tech earnings review, TikTok would be a scoop for Microsoft Banks are struggling, big tech earnings review, TikTok would be a scoop for Microsoft

Banks are struggling, big tech earnings review, TikTok would be a scoop for Microsoft

Equities 6 minutes to read
Peter Garnry

Head of Saxo Strats

Summary:  In today's equity update we talk about the disappointing Q2 results from HSBC and Societe Generale confirming the depressing outlook for banks as the industry fights multiple headwinds from too high costs, low yields, flat yield curve and deteriorating credit quality due to COVID-19. We also talk about the good earnings from the big US technology companies last week and how it cements the path towards higher gains in equities and especially technology stocks. Finally, we take a look at Microsoft's attempt to acquire TikTok in four countries and how it could become a key acquisition for the future of Microsoft.


HSBC and Societe Generale have reported Q2 earnings today shaking investor confidence once again in banks as profits are surprising to the downside with HSBC forecasting loan losses to hit $13bn due the COVID-19 pandemic. HSBC is experiencing headwinds from a slower economy, increasing loan losses predominately among its commercial customers and then a low and flat yield curve. Societe Generale has all the same issues topped up with a faltering trading business leading to a surprise net income €1.3bn loss in Q2.

Source: Bloomberg

Negative on banks as low profitability is “locked” by governments

As result, European banks are down 1% in today’s sessions and are hitting fresh lows not seen since 2009. The STOXX 600 Banks total return index is down 57% since its inception in 2001 and is only up 19% since the lows in 2009. Central banks and private commercial banks are essentially an extension of the government and commercial banks have generally over the past 100 years been a profitable enterprise, but with recent central bank policy and increasing regulation the private commercial banking industry has slipped into “utility state” with very low profitability and limited growth potential. The COVID-19 has caused many governments to issue loan guarantees to ensure banks are continuing to extend credit moving the industry even closer to a quasi-government run credit operation. Overall, it is hard to be optimistic on banks, and even US banks, and our view is to be underweight banks across all regions.

Tech earnings surprised paving the way for more gains

Last week saw earnings from all the major US technology companies and they were all strong relative to the weak backdrop of overall economic activity bolstering confidence among investors in their bets on technology stocks. Especially, Facebook and Google showed robust advertising revenue highlighting the fact that even in a struggling economy the technology giants can increase revenue as activity is still being pushed online. This characteristic will continue to push up market valuation on technology companies and with the US 10-year yield at 0.54% investors will accept the high valuations.

Source: Bloomberg

The thing with growth stocks in a low yield environment is that you are willing to pay a very high valuation because of the alternative and growth compounding. Imagine a growth technology company growing 15% a year with a valuation of 2% free cash flow yield. The yield itself is low but still four times higher than what is offered in risk-free bonds. The investor buying the shares at this high valuation could easily absorb a growth slowdown to 7.5% per year and a 30% increase in the free cash flow yield and still have a much more attractive expected return over the long-term. That is in a nutshell the new paradigm we are in – at current yields almost everything goes in equities except for low growth value stocks.

Microsoft golden moment to enter internet media

We have been arguing for years as the US-China trade war raged on that the conflict was evolving into a new “cold war” and that it was basically a fight over technology which naturally would lead to two “systems” on the Internet. With the Trump administration’s recent ban on TikTok in the US its parent company ByteDance has been scrambling to save its US business. ByteDance has argued for a spin-off into a separate entity but that would still allow operational ties back to its Chinese entity, something the US security intelligence apparatus would argue against. Microsoft is brokering a deal to acquire TikTok’s business in the US, Canada, Australia and New Zealand and is aiming to complete the deal before September 15. According to a Reuters report, ByteDance believes TikTok is worth $50bn and thus the Microsoft deal to acquire the business in four countries would most likely be a sizeable share of this value; the US business has alone 100mn users. Microsoft has in recent years acquired assets outside its core operating system and cloud business via acquisitions of Minecraft and LinkedIn. In our view this could be an essential deal to Microsoft as the company clearly lacks a stronghold in social media and internet media, and the TikTok business would propel into a size where it is a threat to Facebook and Google. Facebook’s acquisition of Instagram was immediately touted as too expensive but has in hindsight been heralded as a genius stroke by Facebook. Likewise, Microsoft’s potential acquisition of TikTok could become a game changer for the company and it needs a stronghold in internet media as this category will become even bigger in the future.

Source: Bloomberg

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)
Full disclaimer (https://www.home.saxo/legal/saxoselect-disclaimer/disclaimer)

Saxo Bank (Schweiz) AG
The Circle 38
CH-8058
Zürich-Flughafen
Switzerland

Contact Saxo

Select region

Switzerland
Switzerland

All trading carries risk. Losses can exceed deposits on margin products. You should consider whether you understand how our products work and whether you can afford to take the high risk of losing your money. To help you understand the risks involved we have put together a general Risk Warning series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. The KIDs can be accessed within the trading platform. Please note that the full prospectus can be obtained free of charge from Saxo Bank (Switzerland) ltd. or the issuer.

This website can be accessed worldwide however the information on the website is related to Saxo Bank (Switzerland) Ltd. All clients will directly engage with Saxo Bank (Switzerland) Ltd. and all client agreements will be entered into with Saxo Bank (Switzerland) Ltd. and thus governed by Swiss Law.

The content of this website represents marketing material and has not been notified or submitted to any supervisory authority.

If you contact Saxo Bank (Switzerland) Ltd. or visit this website, you acknowledge and agree that any data that you transmit to Saxo Bank (Switzerland) Ltd., either through this website, by telephone or by any other means of communication (e.g. e-mail), may be collected or recorded and transferred to other Saxo Bank Group companies or third parties in Switzerland or abroad and may be stored or otherwise processed by them or Saxo Bank (Switzerland) Ltd. You release Saxo Bank (Switzerland) Ltd. from its obligations under Swiss banking and securities dealer secrecies and, to the extent permitted by law, data protection laws as well as other laws and obligations to protect privacy. Saxo Bank (Switzerland) Ltd. has implemented appropriate technical and organizational measures to protect data from unauthorized processing and disclosure and applies appropriate safeguards to guarantee adequate protection of such data.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the U.S. and other countries. App Store is a service mark of Apple Inc.