5 to 11 June: Interview with a Vampire

For US markets, a standout feature of the last few years has been the concentration of returns and profitability across a very small number of firms. Indeed, the overall number of listed companies in the US has fallen from 7,300 in the late 90’s to only 3,599 today. Moreover, the share of total profits generated by the top 100 firms has shifted from around 50% in the 70/80/90s to approximately 85%. This dynamic owes much to the technology sector and its “disruption” of traditional business models. As such, the contribution of tech stocks to equity returns has been extremely significant; the NASDAQ has outperformed the S&P 500 every year since 2012, whilst the MSCI AC Asia IT index has delivered almost 2.25x the return of its (already tech heavy) MSCI AC Asia parent over 5 years.

This paradigm has prompted acronyms such as “Fang” – Facebook, Amazon, Netflix, Alphabet (Google) and “Faamg” – Facebook, Apple, Amazon, Microsoft, Alphabet (Google). According to a Goldman Sachs report last week, this latter group explains 37% of the S&P return YTD, a USD 660bn gain (equivalent to the combined GDP of Hong Kong and South Africa). However, there is now concern that the story has got ahead of itself – as GS comment “this outperformance, driven by secular growth and the death of the reflation narrative, has created positioning extremes, factor crowding and difficult to decipher risk narratives.” Indeed, separately Bank of America suggested the sector is the most overweight it has ever been and that “based on EV/Sales, which would not be impacted by accounting differences such as the inconsistent treatment of stock-based compensation… tech trades at its highest relative multiple since the Tech Bubble, and is trading well above average even when excluding the Tech Bubble.”

Of course, the tech rally is certainly not without foundation. However, there is a case that a combination of excess liquidity, few other bright spots across developed markets and strong momentum has caused investors to forget potential cyclicality. Moreover, the global success of US tech firms has perhaps masked the overall picture in US equities. Elsewhere, the oil price continued its struggle, with another week of losses as the Energy Information Agency projected that US domestic oil output will top 10 million barrels a day in 2018.
This week we have a FED meeting, at which we expect a rate rise, as well as Bank of England, Bank of Japan and Swiss National Bank gatherings at which policy is likely to be left on hold. There is also a Eurogroup meeting, which will focus on the Greek bailout review.

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