Rewards for investors who get their heads in The Cloud
Jeremy Stewart is head of wealth management and private banking at Danske Bank
I don't know if it is my age or my lack of imagination which makes it difficult for me to see the connection between 'The Cloud' and millions of computer servers in many thousands of locations around the world. However what is evident, even to me, is the strong connection between 'The Cloud' and recent share price movements of some leading companies.
Last week Bloomberg highlighted that Amazon, Google and Microsoft all exceeded profit expectations for the last quarter. The market response saw the aggregate market capitalisation of these companies surge by more than £60bn immediately after the profit announcements.
Interestingly, Bloomberg associated the improved profitability of these companies with their successful strategies for harnessing and leveraging new business models, enabled by cloud computing. As an example Amazon Web Services, the company's cloud computing platform, accounted for 52% of its operating profit for the quarter. In contrast many of the more traditional IT companies are seeing their share prices struggle to make headway.
In support of the current share prices of Google (Alphabet Inc) and Microsoft analysts anticipate strong growth in future earnings, at average annual rates of 8% and 16.7% respectively over the next five years. For Amazon the same figure is a heady 33.5%.
This is an example of the risks and rewards of investing. If the paradigm shift created by cloud computing is realised to the extent that has been predicted the focus will be on reward. If not, investors will be disappointed.
Coming back down to earth from 'The Cloud', general share markets continued to make progress, even in the face of uncertain global growth. Both the FTSE 100 and the FTSE 250 improved by just over 1.5% last week. Indeed all of the main global markets had another positive week. The FTSE is now at its highest level in two months while the S&P 500 has risen by more than 10%. In the S&P 500 numbers, the technology sector, including the companies already mentioned, made a strong contribution to the performance of the overall index with a rise of nearly 18%.
The global economy may continue to see downward pressure on growth as the US and Europe are showing signs of slowing, with China still trying to restart. However, in the short term the markets have been supported by Central Bank action. The People's Bank of China announced a cut of 0.25% in one-year lending rate and deposit rates.