SP500: average strategists’ forecast for 2021 reaches new high

As we previously saw, the massive liquidity injection from major central banks to prevent the economies from falling into a global deflationary depression has generated a significant rebound in equities prices, especially for the mega-cap growth stocks. Figure 1 shows that the FANG+ index is trading over 50% higher than its February high, which was mainly driven by the surge in global liquidity.

Figure 1

Source: Eikon Reuters, RR calculations

In addition, the major 5 central banks (Fed, ECB, BoJ, PBoC and BoE) are expected to increase their balance sheet by another 5 trillion USD in the coming 2 years, to a total of 33 trillion USD, to cover the high costs of national lockdowns.  As a result, ‘Wall Street’ strategists have constantly reviewed their SP500 forecasts for 2021 to the upside in recent months, with the average forecast rising to 4,035 in December according to Bloomberg.

With central banks ‘ready to act’ as soon as we see a sudden tightening in financial conditions (due to a drop in equities), the risk reward in the SP500 is currently skewed to the upside with all the liquidity injections expected to reach markets in the coming months.

Figure 2

Source: Eikon Reuters, Bloomberg

Growth stocks loves liquidity

Even though a significant amount of investors have become increasingly worried about the current state of the equity market and how ‘extremely stretched’ the equity positioning has been in recent weeks, they must not underestimate the force of the liquidity injections coming from central banks. Figure 1 shows the evolution of the major 5 central banks’ assets since 2002 (Fed, ECB, BoJ, PBoC and BoE); after rising by over 7 trillion USD since March, assets of the top 5 central banks are expected to grow by another USD 5tr in the coming two years up to USD 33tr in order to support the high costs of running restrictive economies to fight the pandemic.  

Figure 1

Source: Eikon Reuters, RR calculations

Therefore, although some fundamental ratios such as price-to-sales or the traditional P/E ratio have reached stratospheric levels for some companies and also for the entire equity indexes (for instance, Robert Shiller’s CAPE ratio was of 33.1 in November, far above its 140-year average of 17.1), the constant liquidity injections could continue to support the equity market in the near to medium term, especially the FANG+ stocks. Figure 2 shows the strong co-movement between the total assets from the major 5 central banks and the FANG+ index; we can notice that the titanic rise in central banks assets has ‘perfectly’ matched the strong rebound in the mega-cap growth stocks in the past 8 months.

With 5 trillion USD of assets expected to be added in the coming 24 months, is it really time to be bearish on tech stocks?
Figure 2

Source: Eikon Reuters, RR calculations

The Candy Crush Saga

As you may have heard this week, King Digital Entertainment, the designer of the ultra-popular mobile game ‘Candy Crush’, officially began as a publicly traded company. The company, listed as KING on the New York Stock Exchange, issued 22.2 million shares at a price of $22.50 on Tuesday, giving the IPO an initial value of 499.50 million dollars. After its first day of trading, the company’s share was down 15.6%, far from the 72.7% Twitter’s gain as you can see it on the graph below. As some of the sell-side analysts would say, not such a royal IPO.

image001

(Source: SIX Financial Information, from WSJ)

Is the bearish trend going to continue in the coming weeks?

To begin with, unlike some of its internet-based friends valued over 1 billion US Dollars without making a single dime (Twitter, Snapchat, Pinterest…), KING has generated an annual revenue of $1.89bn (profit of $568mio) despite offering games to players for free (more than 1000% growth compared to the ‘shy’ $164mio revenue in 2012). For instance, Twitter, which was launched in 2006, managed to raise $1.82bn in its IPO last year (November 7) by selling 70 million shares at $26 a share. They are now trading at 47.3 after reaching a high of 73.3 on December 26th 2013, which still represents a 81.9% increase. However, if we have a look at the Income Statement, we can see that Twitter hasn’t recorded a profit for at least the past four years with net losses that came in at $67m in 2010, $164m in 2011, $79.4m in 2012 (its first public financial statement) and $645.3m in 2013 .

Secondly, our thoughts about the company were: ‘is it going to be all about Candy Crush or there are other projects coming?’ The most popular game (Candy Crush Saga), which was created in March 2011 and has managed to catch people’s attention to become an addictive time-waster especially in a tube journey, generated 78% of KING company’s revenue for the last three months of 2013 and approximately has a 100-million user each day. Like most of the game companies, the profits come from a minority of users who buy extra-lives, ‘super-power’ and other add-ons.

But according to his last interview this week, chief executive Riccardo Zacconi who has led King since its start in 2003 seemed really confident about the company’s future. He emphasized that the company’s strategy is to continue to build a portfolio of games and a network of players, and not just ‘find another megahit like Candy Crush’.

We keep a bullish view in the medium term as we believe that KING inherited from the market’s bearish sentiment on the Tech stocks. The heavy-tech NASDAQ composite index was down 2.8% from last Friday’s close to 4,155.759, with Facebook, Twitter and Zynga all down by 10.8%, 7.1% and 10.7%.

Quick chart review: As you can see it in the graph below, the stock continued to plummet after its 15.6% daily loss on Tuesday and ended the week at 18.08 (which represents a 19.7% decrease). It found support below the 18.00 level after it reached a low of 17.62 on Friday.

image002

(Source: Bloomberg)