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UBP dans la presse 06.09.2017

UBP's Norman Villamin is optimistic about technology stocks

UBP's Norman Villamin is optimistic about technology stocks

Hong Kong Economic Times (29.08.2017) - The global stock market performed well in the first half of 2017


Moving into the second half, investors are concerned about various market trends and sectors performances. As the US Federal Reserve has already raised interest rates twice this year, the pace of increasing interest rates and its effects on the stock market have also become the market’s focus. Norman Villamin, Chief Investment Officer of Union Bancaire Privée hereby shares his analysis of the global market trends in the second half of the year. In his view, since corporate earnings, dividends and price-earnings ratio are expected to rise, the global bullish stock market will continue to last; yet at the same time, the final stage of the upward cycle is estimated to have already begun. Therefore, investors are recommended to adopt a selective approach.

US Federal Reserve is expected to raise interest rates again this year

Villamin believes the US economic growth will accelerate in the second half of the year following the slowdown in the first half. Thus, it is expected that the Federal Reserve will raise interest rates again either before the end of this year or next year. Short-term bond interest rates will rise first to 1%, then may go up again depending on the economic growth. He predicts that the practice adopted by the Federal Reserve will be similar to that of the Bank of Japan and the European Central Bank. The yield curve will be normalized in the future and the gap between long and short term debt interest rates will gradually widen. Furthermore, the long and short debt yield which is skewed towards a flat curve during the quantitative easing period will also begin to change. In this situation, bond price will be under pressure, making equities a better investment choice.

Following the second rate hike in June this year, Yellen, Chairwoman of the Federal Reserve said that the authority would soon begin to cut back on its current $4.5 trillion balance sheet on a monthly basis. Villamin noted, “If the Federal Reserve indeed implements a shrinking of the balance sheet, not only will it be able to push up the yield of long-term debt, but will also make the yield curve steeper and widen banks’ interest rates difference. This will substantially improve the profit environment and promote economic development. Villamin expects the authority to disclose more details of its balance sheet plan in September.

Optimistic about technology stocks

Although global technology stocks have hit new highs, many investors are worried that a tech bubble will emerge again. Despite the general concern, Villamin is optimistic with regards to technology stocks. He explains, “People compare the existing condition with that during the previous bubble in 2000. However, the two situations are completely different. 17 years ago, technology stocks were hardly recording any profit and were in a vulnerable situation where their market share would easily be taken away by physical stores that ventured into their tech realm. Today, both the profit and cash flow growth of tech giants are stronger than ever, in which some cases have enabled them to even acquire physical stores”. In fact, the acquisition of high-end supermarket chain Whole Foods by the US technology giant Amazon earlier this year is a prime example. Villamin points out that many leading tech companies are actively developing financial technology (FinTech), which may gradually take away businesses from traditional banks in the near future.

Despite the high market valuation of tech stocks, Villamin notes, “Return on equity is rapidly on the rise, investors should take advantage of the market adjustment and increase holdings. Investors would of course need to carefully select large enterprises with strong cash flow that do not require financings from shareholders. Meanwhile, they should also be cautious of small and medium enterprises which seek funding as the rise of interest rates will only make financing costs continue to increase.

As for the Hong Kong stock market, Villamin points out that in the past, when the pace of rising interest rates slowed down in the US, the assets valued at Hong Kong dollars, such as the property and stock markets, were good assets. Although the Hang Seng Index has risen 20% since the beginning of this year, the price-to-earnings ratio also rose for more than 14- fold. He believes that the valuation of Hong Kong stocks is still reasonable and will have momentum to rise continuously in the second half of the year.

- Text translated from traditional Chinese to English -
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Norman Villamin
CIO Private Banking

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