Apple suppliers have been slashing guidance and warning us about faltering demand for the past three months, so I’m somewhat surprised that the latest warning, this time from Apple themselves, has come as such a shock to the market. The major concern is that the revenue cut largely came from China. The question on the market’s lips (as it were) is, is this limited to Apple? Or specific to a slowing mobile phone upgrade cycle? Or a more widespread cyclical slowdown?
As ever, I would suggest there is no golden dart here. China is slowing; just look at recent PMI data which showed contraction for the first time since 2015. Then mobile phones are getting better and better (and therefore, more expensive). People are upgrading less often; my contract used to run for one year to pay off my phone, then it was 18 months and now it’s two years; yes this is happening and yes I am happy to not always have the latest phone (last year’s one is still great).
On top of all of this, I am not sure if you have read about it (!) but apparently there is a trade war going on between the US and China; there is also a possibility that this has caused the Chinese to be less enthused about buying Apple (and American) goods in general. These days the Chinese options are cheaper and very sleek; so why not… It does feel like there is a bit of an Apple pricing error too; is it really that much better than the rest?
The market has been weak in recent months and is definitely in sell-off mode; so any bad news is generally focussed on and traded aggressively. It is noteworthy that the overnight sell-off, perhaps unsurprisingly, has concentrated on smartphone and China-related cyclicals. Market moves across regions are mixed; Europe is well off initial lows and markets like Australia were up overnight.
The coming days and weeks will tell us if the Apple downgrade was largely stock specific, sector specific or a signal of a more general macro slowdown. If we see further warnings across multiple sectors (luxury goods and industrials would be obvious bellwethers) then that could signal a more meaningful slowdown and we could be in for a continuation of the volatility we saw towards the end of last year.
There are lots of risks and potential catalysts making this a particularly difficult period to be an active manager. Whether it’s Brexit, trade wars or potential Chinese stimulation; trying to predict which direction the market is likely to trade in in the coming few weeks and months is little more than intellectual guess work and in general we spend far too long hypothesising about it. Instead, what we continue to look for is strong stock ideas that we believe will outperform over the long term – whatever the market conditions.
Opinions and views from the Equities team at Kames Capital are not an investment recommendation, research or advice and should not be considered as such. Content discussing investment strategies and stocks is derived from and solely relates to the investment management activities of Kames Capital.
About the author
Neil Goddin is Head of Equity Quantitative Analysis and also has joint responsibility for managing funds within the Global Equities team. In addition to investment management responsibilities, he leads the team responsible for building and maintaining the Kames equity investment screen, which is used across the equity team, and advising on optimising risk levels in the funds. Neil’s role differs from most typical quant professionals as he sits within the fundamental team, has joint responsibility for managing funds and is an integral part of the equity team; rather than the more traditional model where quant teams sit separately, away from investors. Neil joined us in 2012 from LV Asset Management where he was Head of Investment Risk. Prior to that, he worked for WestLB Mellon Asset Management and Deutsche Asset Management in various risk-management roles. He has 20 years’ industry experience and is a Certified Risk Manager by the Global Association of Risk Professionals*.
*As at 30 November 2018.