September 02, 2020
September 02, 2020 | Adviser News
Patrick Noble, Senior Investment Strategist, Zurich Investments
It’s hard to believe the incredible gains that share markets around the world have made in recent months. Depressionary levels of unemployment and economic contraction have seen corporate profits plummet yet the returns from equity markets look remarkably resilient. Massive amounts of government support, negligible interest rates and promising vaccine developments have clearly helped sentiment, however beneath the surface it has been a select group of stocks that have lifted markets off their March lows.
Leading the charge has been the US and its set of glamour technology stocks. The likes of Facebook, Apple, Amazon and Google (Alphabet) have literally being ‘fangin’ it’, pushing major US indices back to all-time highs leaving all in their wake. Apple’s market cap has surpassed $2 trillion dollars and another crowd favourite Tesla, has seen its share price rocket in excess of 450% in 2020 alone. Their fortunes are in stark contrast to other parts of the market that continue to languish and has created a wide dispersion in valuations, polarising the market between ‘expensive’ growth stocks and ‘cheap’ value stocks.
Doing the splits
Still, the appeal of owning some technology stocks does make sense but is it a one-way bet? For now, flows into “FANG” ETFs and select tech stocks remain the popular choice for mum and dad investors but some multiples are in rarefied air.
Perhaps the only deterrent for investors has been high share prices rather than high valuations. Stock splits can solve for half this problem by lowering share prices, however this does nothing for overall valuations given the offsetting increase in shares. Nevertheless, the recent stock splits of Apple and Tesla are expected to make both more palatable to the average punter and while I admire the Cybertruck as much as the next person, Tesla’s valuation appears higher than a SpaceX rocket.
Focus, Focus, Focus
To be sure, not all growth stocks trade at similar valuations and in the tech space, many are benefitting from the digital transformation with attractive earnings profiles in their given industry.
But given growing index concentrations, are some parts of the market ‘over-owned’? Rather than obsessing between growth and value, could investors instead focus on unique opportunity sets that can deliver a diversified stream of returns in a portfolio?
Semiconductors, for instance, are one way that investors can capture value from digital transformation. Technologies ranging from electric & autonomous vehicles, through to 5G, AI and sensors are driving digitisation across multiple industries. These key components will therefore be demand beneficiaries.
While some pockets of the market may be ‘fangin’ it’, it does not mean portfolios should be on autopilot. A portfolio that focuses on differentiated opportunity sets can lean against market concentrations and exploit long-term structural trends delivering a diversified return profile regardless of prevailing market style.
Important information: The content of this publication are the opinions of the writer and is intended as general information only which does not take into account the personal investment objectives, financial situation or needs of any person. It is dated September 2020, is given in good faith and is derived from sources believed to be accurate as at this date, which may be subject to change. It should not be considered to be a comprehensive statement on any matter and should not be relied on as such. Past performance is not a reliable indicator of future performance and should be used as a general guide only. Neither Zurich Australia Limited ABN 92 000 010 195 AFSL 232510, nor Zurich Investment Management Limited ABN 56 063 278 400 AFSL 232511 of 5 Blue Street North Sydney NSW 2060, nor any of its related entities, employees or directors (Zurich) give any warranty of reliability or accuracy nor accept any responsibility arising in any way including by reason of negligence for errors and omissions. Zurich recommends investors seek advice from appropriately qualified financial advisers. Zurich and its related entities receive remuneration such as fees, charges and premiums for the financial products which they issue. Details of these payments can be found in the relevant fund Product Disclosure Statement. No part of this document may be reproduced without prior written permission from Zurich.
Past performance is not a reliable indicator of future performance. GINN XYY9MQ.00000.SP.03. PNOE-015967-2020