Investment

The Nifty Fifty for the 21st Century

Elon Musk and Jeff Bezos have warned their stocks are ahead of events.  Warren Buffett can’t find anything worth buying.  The market begs to differ.

Shares in the world’s largest internet companies are slightly below their February peak, but they are now well ahead of the start of the year, with the Fang+ index up 6.7%. The broadly-based Nasdaq technology index is – 4.6% down on the start of January. But the S&P index has fared far worse with a fall of  -12.5% despite its boost from technology.  

The five biggest (technology) stocks in the US – Microsoft, Amazon, Facebook, Netflix and Alphabet – now account for a record 20% of the S&P index thanks to an inflow of funds. It amounts to the biggest concentration of firepower in history.

Never underestimate the ability of old money to move with the times

Activity in tech-driven venture capital is a bit subdued compared to January but the demand in several sectors, such as AI and biotech, is strong. First-quarter results from the technology giants have been encouraging. This is no time for family offices to avoid the venture capital market. 

Market participants note the $2 trillion stimulus from the Federal Reserve has unlocked the Eurodollar credit market, as was the case following the 2008 crisis.  Averaging $140 billion in daily volume, this market is used by serious players, and its return to health is important to fund flows.

Wealth adviser Cullen Roach studies them. He argues that US government firepower will fuel the market for some time to come: “The government’s deficit should be around $3.7 trillion this year. People don’t understand how big that number is. And how big a boon this is to corporate America because ultimately it all flows to corporations, as Americans don’t save.”

And most of these flows, plus corporate loans, are heading in the direction of tech-driven growth opportunities – the last bull market left standing – as value stocks suffer a liquidity drought. For the record, small-cap value stocks set the scene by falling -41.5% in the first quarter against -19.6% from the S&P 500. 

Back in 1973, an apt comparison, share and property markets were hit by Watergate; an oil price hike; rises in interest rates and the dollar quitting the gold standard.

In those days, the equivalents to today’s tech-driven companies were the Nifty Fifty which used scale, management theory, powerful franchises and strong balance sheets to build their revenues.

The Nifty Fifty were called “go-go” stocks during the bull market of the 1960s – beloved by a new breed of professional mutual fund managers who saw them as classic “buy and hold” opportunities. They often developed out of successful family businesses, providing further reassurance. And they were the last companies to fall victim to the sell off.   

Some of them – the likes of Xerox, Avon, Eastman Kodak and Polaroid – were poleaxed because they had become complacent, and failed to refresh their businesses. The rest fell back because their share ratings became too high for the bear market to tolerate, a fate which may befall large tech stocks at some point.

But the majority of the Nifty Fifty list ended up being acquired, or living to fight another day and bounced back reasonably quickly when they became oversold. They included Disney, McDonald’s, IBM, Walmart, Coca-Cola, Pfizer and Johnson & Johnson. 

Taken overall, Nifty Fifty stocks have delivered a decent return to investors and innovated their businesses, as Wharton professor Jeremy Siegel has often argued.

This time round, yet again, large companies with a strong franchise and a resilient balance sheet will continue to capture fund flows but only if they also possess a powerful technological edge.

According to Storm Uru, global equity manager at Liontrust Asset Managemen, he sees a growing rift between the new economy, and the old. “The strongest into the crisis will be the strongest out.”

Global equity manager James Anderson of Baillie Gifford has built an enviable track record out of his conviction that technology will revolutionise the global economy.

He believes applications will speed up, as we move out of the coronavirus crisis and embrace new ways of life, at a greater distance from each other.

Chinese tech companies are currently setting new standards in fintech, which will require a US response. Robotics will revolutionise agriculture. Virtual reality is coming down the track, as the gaming industry booms. Disruption in oil market has confirmed the direction of travel for clean energy. 

According to Anderson: “It is possible that in five years time the end of carbon may be seen as more enduringly significant than Covid-19.”

Even now, technology is playing a big role on the coronavirus front line. It is biotech which makes it possible to achieve the rapid production of a vaccine against the coronavirus. Communications tools like Zoom, telehealth and mobile phone apps are helping individuals achieve distancing.   

3D printing is a technology which is quietly making inroads in manufacturing. It has been manufacturing swabs and equipment for virus protection.

Carbon 3d, the world’s biggest digital manufacturing platform recently raised $260 million led by Baillie Gifford and Madrone Capital Partners, backed by Rob Walton, heir to a resilient family fortune at the Nifty Fifty’s Walmart. Never underestimate the ability of old money to move with the times.  

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