Logo

ISSUE 23


Goldman Sachs Doesn't Think There's a Bubble in Tech Stocks


Bubble warnings are getting louder. American tech giants keep surging ahead of the market, with the Nasdaq Composite Index closing a fresh record. But Goldman Sachs has a soothing message.


Sure, tech stocks are worth a lot. At $3.8 trillion, the combined value of Facebook, Amazon, Apple, Microsoft and Google’s parent Alphabet tops the annual gross domestic product of Germany, and all the companies in Japan’s Topix index of stocks.


But other aspects of their advance differ from bubbles past.


Unlike the rush to Nifty Fifty in the 1960s and dot-com frenzy in the late 1990s, the latest rally in the so-called FAAMG stocks has been built more on solid earnings and less on valuation expansion. Over the past decade, the cohort has seen 87 percent of its share gains coming from profits and only 13 percent from increases in price multiples. That compared with 73 percent and 27 percent, respectively for the rest of the market.


As a result, while tech occupies all top five spots in the market for the first time ever, the group’s price-earnings ratio is relatively subdued. At 22.6 times earnings, the FAAMG block fetches a multiple that’s less than half what the then-big five got in the internet bubble years, data compiled by Goldman Sachs showed.


“Unlike the technology mania of the 1990s, most of this success can be explained by strong fundamentals, revenues and earnings rather than speculation about the future,” strategists Peter Oppenheimer and Guillaume Jaisson wrote in a note. “Given that valuations in aggregate are not very stretched, we do not expect the dominant size and contribution of returns in stock markets to end any time soon.”


How long can tech’s dominance last? The strategists point to history as a guide.


Financial firms ruled the market from the 1800s to 1850s, followed by a six-decade reign by transport stocks as the U.S. expanded its railroad system. Once steam and coal started powering a manufacturing boom, energy took over the market through the 1970s.


Since then, the rise of AT&T, IBM and Microsoft has helped elevate tech’s status as the use of telephones and computers spread. But the industry’s share in the market, even at its peak in 2000, is nowhere close to where other big sectors experienced in the past.


“Leading tech companies today have become very large in terms of market value, but that reflects the significant growth of technology spending and its ability to displace other more traditional capex spending,” the strategists wrote. “Very often the new platforms become virtually the whole market.”


Tech’s dominance is far from over, they said, as more traditional industries such as retail and utilities are forced to embrace the internet and upgrade their equipment. At the same time, innovations such as artificial intelligence mean new areas of growth.


“This ‘snow balling’ effect is similar to what was experienced during the industrial revolution where one technology led to another and caused traditional industries to spend more on technology to survive,” the strategists wrote.


By –Bloomberg



Southeast Asia's Grab launches innovation arm to develop tech start-ups


Southeast Asia’s Grab on Tuesday launched Grab Ventures, its innovation arm to develop technology start-ups in sectors such as transport, food services, logistics and financial services, further expanding beyond ride-hailing.Grab, which made its start as a taxi-booking app six years ago, has ventured into areas including payments and food delivery. Earlier this year, it bought Uber Technologies’regional operations.


“We have articulated our vision to be the everyday app of Southeast Asia, so we are interested in any tech that enables that vision in terms of becoming a complete O2O (online-to- offline) mobile platform,” Chris Yeo, head of Grab Ventures, told Reuters. He said it could look to develop businesses in-house or work with existing start-ups. Grab Ventures’ current portfolio includes self-driving technology firm Drive.ai and Indonesian payments service Kudo. It will seek to partner 8-10 growth-stage start-ups over the next 24 months and may invest in a few.


Grab Ventures will work with government agencies across the region to support such companies by helping them develop and scale technologies. It may also look for private-sector partners, Yeo said.


Its accelerator program, which will provide expertise, technical resources and networks to the start-ups, includes partners from government agencies such as the Info-communications Media Development Authority of Singapore and Enterprise Singapore.


From–Reuters



Microsoft to take on Amazon with $7.5 billion GitHub deal


Chinese e-commerce giant Alibaba Group Holding Ltd will inject some of its online pharmacy business into a listed unit in a deal valued at HK$10.6 billion ($1.35 billion), the firm said in a statement on Tuesday.


Microsoft Corp said on Monday it would buy privately held coding website GitHub Inc for $7.5 billion in an all-stock deal to beef up its cloud computing business and challenge market leader Amazon.com Inc.


The deal is a big bet on Azure, the company’s fast-growing cloud business, as it will be able to lure more code developers who use GitHub and drive more business to Microsoft.


By pulling off its largest acquisition since the $26 billion acquisition of LinkedIn in 2016, Microsoft gets a platform universally known by developers. GitHub calls itself the world’s largest code host with more than 28 million developers using its platform.


After reports of a likely deal between Microsoft and GitHub emerged on Sunday, some users of the software development platform raised doubts on social network Reddit here that GitHub would "eventually favor Microsoft products over competing alternatives."


But Chief Executive Officer Satya Nadella downplayed those concerns by saying on a conference call that GitHub will continue to be an open platform that works with all public clouds.


He said Microsoft will use GitHub to promote company’s own developer tools and use its sales team to speed up adoption of GitHub by its big business customers.


The deal reflects the company’s ongoing pivot to open source software and seeks to further broaden its large and growing development community, Moody’s analyst Richard Lane said.


It’s also a smart move by Microsoft, which has seen scorching growth in its cloud business over the past few years. Azure posted a 93 percent jump in revenue in the third quarter ended March 31.


Last year, the software giant shut down CodePlex, its own rival for GitHub, saying the latter was the dominant location for open source sharing and that most such projects had already migrated there.


After closing the acquisition, expected by the end of the calendar year, GitHub will become a part of Microsoft’s Intelligent Cloud unit.


Microsoft’s Nat Friedman will take over as the Chief Executive Officer of San Francisco-headquartered GitHub, whose current CEO Chris Wanstrath will become a Microsoft technical fellow.


On an adjusted basis, Microsoft expects the deal to add to its operating income in fiscal 2020 and reduce earnings per share by less than 1 percent in 2019 and 2020.


From – Reuters


France's BlaBlaCar bets on Russia's ride-sharing culture


Russia has overtaken France as the biggest market for French ride-sharing startupBlaBlaCar, a growth driven by long distances between Russian cities and a culture of giving lifts to strangers, the company’s co-founder and CEO told Reuters.


Nicolas Brusson said the unlisted company, which entered the Russian market four years ago, plans to invest 10 million euros in Russia next year, more than BlaBlaCar’s total investments over the past three to four years.


“We are talking about 15 million members in Russian which means that more than one Russian of ten is already signed in BlaBlaCar. We are speaking about over 3 million Russians that are transported by BlaBlaCar every month,” he said.


BlaBlaCar’s app works by matching passengers with drivers who have spare space in their vehicle and are heading to the same destination.


The company, founded in Paris in 2006, describes itself as the world’s largest carpooling community. It has two models of making money in Europe, taking a service fee from passengers for every journey or allowing the use of its app under subscription.


Brusson said the first reason for the firm’s success in Russia was cultural.


He said it had to work hard in Europe to persuade customers BlaBlaCar was a safe service. “In Russia people are more used to sharing and got the features of the service faster,” he said.


Before ride-sharing services like Uber came to Russia, it was normal for citizens to flag down a private car in the street, and share the ride, for a modest fee. The practice grew out of the fact that car ownership was not widespread, while taxis were heavily regulated and expensive.


Brusson said the second reason BlaBlaCar did well in Russia “is the size of the country, the shape of the country. It’s a kind of perfect for long distance cooperation because of big population, lots of big cities we can help connect.”Russian economic growth is slowly recovering after two years of recession, but is also under pressure from U.S. sanctions imposed in April on Russian businessmen and big companies.


Brusson said those factors might play to BlaBlaCar’s strengths. “People are going to be more cost-conscious so people will choose services like ours because people can save money and drive cheaper,” he said.


BlaBlaCar is ramping up investment in the Russian market even though its operations in Russia, unlike in European Union markets, are not yet monetized, passengers in Russia pay for their journeys in cash directly to drivers not to the service.


Brusson saw Russia as a very strong financial contributor for BlaBlaCar in terms of four to five years.


“Next year we will invest as much as we’ve done in the last 3-4 years. Because the activity is just doubling year on year, and there is a real need we can help address, so it leads us to invest,” he said.


From –The Star




China Revives Its Push to Make the Yuan Go Global


After more than two years on the back-burner, there are signs that China is once again focusing on its efforts to increase the yuan’s status in global finance.


The yuan grabbed a record 2.8 percent slice of global payments three years ago, before a crackdown on outflows in the wake of the 2015 devaluation saw that figure shrink to 1.7 percent as of April. These days -- with China’s foreign reserves rising and volatility staying low -- officials have a window to refocus on President Xi Jinping’s quest for a bigger Chinese role in global finance.


“There will surely be more utilization of the currency in cross-border transfers this year,” said Ji Tianhe, a China rates and foreign-exchange strategist at BNP Paribas SA. “The exchange rate will be influenced by global financial markets more. Offshore investors will also become a more important driver for onshore bonds.”


Recent strength in the yuan -- which had its biggest rally in 10 years in the first quarter -- has given policy makers room to relax curbs on outflows. China’s foreign reserves, the world’s biggest, increased in all but only three months since the start of last year, while overseas demand for the currency is showing some signs of picking up. Hong Kong yuan deposits increased the most since 2011 in April, according to data released last week.


Building Ties


On top of other measures, a long-term project also may also help boost the yuan’s role: Xi’s Belt and Road Initiative to deepen economic ties with countries across the Eurasian landmass and beyond.


“BRI trade and investment would definitely increase currency flows between China and other Belt and Road countries,” said Ben Yuen, Hong Kong-based fixed-income chief investment officer at BOCHK Asset Management Ltd.


The pace of moves to broaden the yuan’s role remains captive to investor confidence. A steeper rally in the greenback, which just capped its seventh week of gains, could renew concern about a depreciating yuan. The stock market remains stuck in the doldrums, despite MSCI Inc. adding local stocks to its gauges and rising corporate defaults are rippling through the nation’s bond market.


For now, foreign funds appear bullish on Chinese assets, buying a record amount of the nation’s shares last month, while also emerging as the dominant force in government debt. Although the yuan has fallen 2.6 percent against the dollar from its March high, there’s little concern about moves getting out of control -- one-month implied volatility is near an almost five-month low.


Conditions are ripe for officials to take additional steps to boost its global sway, according to MK Tang, Hong Kong-based senior China economist at Goldman Sachs Group Inc. These may include making it easier for foreigners to buy Chinese bonds and allowing domestic investors to buy more overseas assets.


“Internationalizing the yuan would be a natural step for the government to take now,” said Tang.


From –Bloomberg





Potential Excelerate Group 9 Temasek Boulevard Suntec Tower 2 #09-01 Singapore 038989
+65 6407 1344