US, India unattractive on free cash flow yields: Goldman Sachs report | Markets News
The US and Indian equity markets are becoming less attractive on free cash flow (FCF) yields as valuations rise, while more value-oriented markets such as Europe offer significantly higher yields, according to a recent Global Strategy report from Goldman Sachs.
As the US markets start to look expensive, investors are looking at other markets where companies are profitable and are still attractive in terms of valuation, with much of their attention towards Europe than Asia. The tech heavy S&P 500 index offers a FCF yield of 2.7 per cent as compared to 5 per cent for Stoxx 600, a broad index for European equities. The same number for the Nifty 50 works out to 2.7 per cent, at the same level as the S&P 500 but without any AI play.
Free cash flow yields is a financial metric that measures a company’s ability to generate free cash flow relative to its market capitalisation. A higher number indicates better cash flow efficiency.
Over the last few years there has been a huge rise in capex spending by the leading tech companies in the USA. For a decade after the financial crisis, these firms became hugely profitable, benefitting from the surge in demand for software and cloud computing while piggybacking off the capex that was installed in the dot com era.
They were capital light and enjoyed the valuation support driven by zero interest rates.
“In an era of weak nominal growth and excess capacity in many ‘old economy’ industries, the Technology sector’s remarkable margin and ROE progression made it hugely attractive. With the introduction of ChatGPT, an explosion in capex among the hyperscalers has increasingly eroded their premium cash flows, forcing them to turn to debt and equity markets for funding”, the Goldman Sachs report says.
Driven by a growing anxiety about the returns that the capex might generate in the future, these dominant Tech companies have de-rated. The biggest five stocks in the US now have a price-to-earnings ratio only marginally above the other 495 but had previously been on a premium consistently since 2017.
Source: www.business-standard.com