Is winter coming for global equities?

Alex Burke,  Senior Writer,  No More Practice Education

With Apple recently seeing its worst day of trading in five years, is it time to ask whether the FAANGs have been de-fanged? 

The big tech stocks have been considered the doyens of global equity markets by many investors for quite some time, but consider the impact of Apple chief executive Tim Cook admitting that sales in China had been lower than expected: the company's share price plunged by 10%, losing nearly US$75 billion in market value.  

The Dow Jones Industrial Average dropped by 2.5% on the same day, and the S&P 500 fell by 2.5%. Some of Apple's suppliers were affected too, such as radio frequency chip company Qorvo, whose share price dropped by 9.1%. Facial recognition technology company Lumentum fell by 8.4%, and microchip manufacturers Broadcom, Micron and Intel dropped by 8.9%, 5.3% and 5.5% respectively.  

All of this suggests that when one tech giant suffers, anything connected to it tends to feel the pain as well. And when it comes to companies like Apple, Alphabet and Facebook, those connections can be vast.  

What was the cause? 

In a letter to Apple investors, Cook cited several headwinds affecting the company's performance, including a strong US dollar, supply constraints and "economic weakness in some emerging markets," which had "significantly greater impact than we had projected."  

Of those emerging markets, the one that had the biggest impact, in Cook's opinion, was China. He explained that "China’s economy began to slow in the second half of 2018. The government-reported GDP growth during the September quarter was the second lowest in the last 25 years." 

This was driven, he argued, by the "rising trade tensions with the United States." 

"As the climate of mounting uncertainty weighed on financial markets," he continued, "the effects appeared to reach consumers as well, with traffic to our retail stores and our channel partners in China declining as the quarter progressed." 

How far will this go?  

Consider what the South China Morning Post reported the chief executive of Chinese internet search giant Baidu, Robin Yanhong Li, as saying to employees: "winter is coming."  

He was speaking of the Chinese economy, but the same may be true for many tech companies throughout the world, given the significant proportion which are either domiciled in or are heavily exposed to China.  

It's worth noting that in early 2018, Cook told investors a very different story about Chinese sales, saying: "Everywhere I look, I feel really good about how we're doing in China." If other companies are having similar road to Damascus moments about future growth in emerging markets, it seems likely Apple won't be the only strong player in global equity portfolios to suffer at least some short-term pain.  

Because of all this, it could well be worth revisiting where investors' money should be going throughout the world. 

 


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