The analysis by Michele Morra, Portfolio Manager of Moneyfarm , not only on Facebook, Amazon, Alphabet, Apple and Microsoft
The concept of frontier is ambivalent by its nature and is closely linked to our perception of the unknown and uncertain. The frontier represents the limit of the known world and beyond it threats and opportunities are projected. However, there are few nations that find their founding myth in the frontier and the United States is certainly among them. For Americans, the frontier is at the same time a geographical place, a historical period and an economic and cultural attitude.
When we talk about the "frontier" in the United States we mean the colonization process of the western part of the country which, in fact, had as its theater the territory crystallized in the cultural imagination as the "Wild West". In uncertain times like the ones we are experiencing, in which many investors feel like the pioneers of a territory full of pitfalls and opportunities, the American frontier (on land, in the sea and in space) claims the attention of the world and becomes one more turn the fundamental crossroads for the fate of the world economy, for better or for worse. The frontier of hegemonic power, after all, is in a sense the place where the fate of humanity is played out.
And it is precisely in the lands annexed to the United States in the second half of the nineteenth century where all world investors look with concern at the spread of Covid, it is there where the racial fractures that shake the world emerge and rockets are designed to go to Mars. It is there that the barrels of oil got stuck in dusty warehouses in April, but it is also there that the most innovative companies of our time are based, which are proving to be unshakable totems, giving breath to the world's stock exchanges. And, again, it is from the coast of California that the ships that protect the real frontier of the empire set sail, which is not in Tijuana but in Taiwan, in the South China Sea.
In this context, the markets offered proof of great resilience, recording the best quarter since 1987 and recovering the losses of March. The recession stands out in the background, but by reading through the folds of complexity we can find numerous positive ideas, which allow us to experience the journey to the new world, at least as regards investments, with cautious optimism.
WINNERS AND WINNERS
The violence of the equity market correction in the first quarter was matched by the speed of the market recovery we saw in June. In the second quarter, US equities recorded growth of 17.6% for investors in euros and Eurostoxx did slightly better with + 17.9%. Emerging markets also experienced the rebound with growth of 15.3%.
These performances alone fail to tell the full story of what is happening in the markets. From a strictly economic point of view, in a scenario that remains recessive, the pandemic seems to have accelerated some trends that have been going on for some time, orienting investors towards stocks and sectors with high growth potential.
If we look at the performance of the various sectors of the American economy since the beginning of the year, we discover that the lion's share has been played by the technology sectors (with a positive performance since the beginning of the year) and by pharmaceuticals, while the most paying were energy stocks (-36%), financials (-25%) and real estate (-20%).
While it is not anomalous that in a recessionary phase the dispersion between the securities (and sectors) that have performed best and those that have performed worse increases, the gap that has been created between the various sectors of the economy has something new and is linked not only to the fact that this recession was somehow induced to deal with a health emergency, but above all to the fact that it occurred at a crucial time of economic transition. For this reason it is probably a structural trend.
The extraordinary performance of certain companies such as the tech giants – companies that are children of the mentality of the US frontier – and the digital services sector reminds us that today investors, in giving a price to the financial markets, are particularly oriented towards a future linked to the prospects of growth of the most dynamic sectors of the economy. In this light, the difference in performance between growth stocks (companies with broad growth prospects) and value stocks (characterized by attractive valuations in the current environment) can also be explained. The former, which include many of the companies that have benefited from the quarantine, have been rewarded by investors with extraordinary performance since the beginning of the year, while the latter have paid a lot. Here, too, the level of dispersion that remains anomalous is surprising.
This type of dynamic has a key consequence for investors: the composition of equity markets does not necessarily reflect that of the real economy. As regards the context of this crisis, those who have chosen a global diversification approach have focused on a basket of stocks that has been shown to be more resilient than the economy in general.
Suffice it to say that, thanks to their extraordinary performance, the five largest tech companies (Facebook, Amazon, Alphabet, Apple and Microsoft) have come to weigh around 20% of the S & P500 index. This eventuality, even if it opens the door to a whole series of imbalances that must be taken into consideration, reminds us how much the relationship between economic performance and market performance is today extremely complex.
It almost seems that investors now consider these tech giants as safe havens, securities whose performance is almost unrelated to the general trend of the economy, by virtue of a superior operating capacity that allows them to generate continuous growth and that will allow them stocks, along with others placed mainly in the IT industry, to thrive. In this sense, even an economic contraction like the one underway does not necessarily translate into a contraction of equal magnitude on the financial markets, where a large portion of capitalization is linked to companies that have used the economic context to strengthen their position of strength. .
THE REAL ECONOMY
Returning to the real economy, the macroeconomic data arriving from all over the world remain negative but here too there are reasons that lead us to look to the next few months with confidence. We recall that the markets are still oriented towards a scenario that foresees a gradual improvement in economic data between now and the end of the year. Net of the shocking data on global GDP contraction, we have more than one reason to believe that this is still the most likely scenario. First, it is important to note that economic policy measures, in terms of bond purchases, interest rate cuts and programs to reduce unemployment, have been timely and effective in the most advanced economies. The scale of the measures provided important support for market liquidity, helping to leave the darkest moment of the crisis behind. The low interest rates served to quickly move capital towards the lists.
With a very accommodative economic policy, central bankers have effectively urged investors to take more risk. Furthermore, when rates fall, there are various economic and technical effects that make high market valuations such as those we find now more sustainable. Despite the negative economic data, most of the macro and confidence indicators released in June have in a sense beaten expectations, painting a scenario that is overall better than expected. Finally, the health aspect, although certainly the most uncertain, projects us into a scenario in which at least we have the security of better means and answers to the progress of the pandemic.
All these signals offer us some holds, if not to avoid the risk of new corrections, at least to rationalize the record trend of the quarter. But what indications do they leave us for the coming months? The world beyond the border remains uncertain, but we can be reasonably sure that political support will remain strong. Central banks will continue to provide liquidity and rate positioning will continue to urge investors to cautiously move further up the risk curve in search of yields.
The macro scenario remains in the dark and to verify whether the encouraging signs of recovery will have followed in the coming months it will be crucial to monitor the effects on the labor market, whose knots will come to a head in the autumn. Even from a health point of view, although we certainly know the virus better, we cannot forget that the pandemic is still out of control in many geographies.
Given all the risks, we believe that the time has come to start focusing portfolios towards long-term returns, gradually increasing the risk of the portfolios. Uncertainty remains high and we do not exclude new phases of volatility, but we believe that the time is ripe to begin to gradually focus on optimizing sources of returns, remembering that we entered the crisis with an already cautious positioning.
If there is a lesson that many investors have learned in recent months, it is that trying to predict the trend in the markets in the short term can be very risky. Those who left the market on the wave of volatility could have generated very significant damage to the construction of their long-term financial position, while those who managed to remain focused on achieving their financial objectives and faithful to the investment plan are today in being able to evaluate new profitability options. The journey to discover the new world remains fraught with pitfalls, but we continue to march west with confidence.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/perche-facebook-amazon-alphabet-apple-e-microsoft-trottano-in-borsa/ on Sun, 09 Aug 2020 08:00:17 +0000.