Seeing beyond the Apple Watch hype

Analysts are more excited by Apple Pay

 

The Apple Watch hype has been remarkable, given the device’s obvious shortcomings.

Do people need or want a phone on their wrist? Why bother, when smartphones are already so versatile and convenient? Isn’t charging your watch an unnecessary pain?

Watch revenues are likely to be insubstantial, with Apple remaining an iPhone-driven company.

If anything, analysts are more excited by Apple Pay, with Watch regarded as an appendage, a reminder that Apple can still innovate and be cool.

In truth, there was never any real evidence that Apple had lost its ability to innovate.

As for being cool, Watch seems anything but – Apple has long celebrated taste and good design, but this seems more likely to appeal to crass status-seekers.

Of course, it may well prove a huge success – who knows? Furthermore, even if it flops, the latest iPhone upgrade cycle should more than compensate.

Trading on 14 times earnings estimates and with $165 billion in cash, Apple’s valuation remains relatively undemanding – and valuation, not product hype, is what investors should focus on. Will Scotland’s vote impact? It’s obvious the financial community is fearful of a Yes vote in Thursday’s independence vote in Scotland, given the Financial Times’ recent editorial warning and cautionary soundings from luminaries such as George Soros, economist Kenneth Rogoff and Bank of England governor Mark Carney (inset).

Analysts suggest the impact on the FTSE may be more limited, however. Credit Suisse suggests investors focus on stocks exposed to Scotland’s economy, with obvious risks for banks such as Royal Bank of Scotland, TSB and Lloyd’s as well as North Sea oil-related stocks, which may become embroiled in legal disputes. Stocks with production facilities in Scotland, it says, such as Diageo and Pernod-Ricard, might actually benefit if the ‘Scottish sterling’ devalues.

Citigroup notes that the uncertainty poses an “unhelpful backdrop” for companies and shareholders.

However, a Yes vote would likely cause weakness in sterling, something that may support equities – Citi says the FTSE’s underperformance over the last 18 months is closely correlated with sterling strength. Additionally, domestic uncertainty may not affect most UK companies, given that almost 75 per cent of revenues come from overseas.

Overall, says Citi, these balancing factors mean the vote should have little impact on stocks, “barring short-term risks”.

Libel victory no panacea Shares in Quindell, the UK insurance-outsourcing firm described as a “country club built on quicksand” by shortsellers Gotham City Research, briefly jumped last week after the company announced it had won a high court libel action.

Shares gave up those gains within hours, however, as it became clear this was a hollow victory.

US-based Gotham never turned up to defend itself, and less restrictive US libel laws mean Quindell will likely never gain damages.

Quindell shares suffered a 39 per cent one-day drop following last April’s damning Gotham report. Ever since, its accounting procedures have come under the microscope, especially from the Financial Times’ influential Alphaville blog. Shares have continued to decline, losing three-quarters of their value.

Quindell’s problem is not Gotham – it’s that it has failed to convince investors, as exemplified by the limp share price reaction to last week’s libel victory. Boring is bullish Traders have been fighting to stay awake of late, with the S&P 500 going 14 days without posting a move of 0.5 per cent in either direction – the longest streak in 19 years.

Boring? Yes, but don’t complain, says technical analyst Ryan Detrick. He found 18 instances of similar inactivity over the last 44 years. Three months later, markets were higher 89 per cent of the time.

Over 12 months, stocks were higher on 88 per cent of occasions, average returns exceeding 16 per cent – almost twice as high as historical norms.

In other words, “boring is bullish”.

Hope springs eternal 2014 was meant to be a stock-picker’s market: it’s been anything but.

S&P Dow Jones Indices data show 70 per cent of global equity funds have underperformed benchmarks over the last year. Just 23 per cent of US large-cap managers have outperformed in 2014, says Goldman Sachs, one of the worst performances of the last decade.

In 2013 and previous years, underperformance was blamed on the high correlation among stocks – that is, stocks were largely moving in unison. Managers predicted correlations would fall back in 2014, allowing them to separate the wheat from the chaff.

Stock correlations have indeed fallen, to below-average levels in most markets, but managers continue to lag.

Expect to be told that 2015 will be different, or that stock-pickers will shine when a bear market eventually arrives.

Hope springs eternal, after all, with professional investors remaining conveniently impervious to evidence.

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