226. Elon Musk and the potential demise of Twitter
Jeremy Gleeson, manager of AXA Framlington Global Technology, comments on the performance of tech...
America went to the polls this week for the Midterm elections. Biden’s Democrats had been struggling with the electorate – angry about higher inflation – and there was talk of a ‘sea of red’ appearing, suggesting the Republicans could take both the House of Representatives and the Senate.
At the time of writing, indications are that the Republicans have not done as well as expected, but they could gain enough control in Congress to effectively gridlock government decision making.
But according to James Yardley, senior research analyst at FundCalibre, this can be the best outcome for the stock market, as there would be fewer policy changes in the next two years. “The stock market loves nothing more than a divided government which can’t get in the way of business,” he said.
Analysis by Deutsche Bank shows that in each of the 19 midterm cycles since World War II, the US stock market (as measured by the S&P 500) has been higher one year later.
“However, the election is really a sideshow for markets at the moment – the main attraction is inflation and the central bank’s reaction,” continued James. “When will inflation peak, and when will the Federal Reserve pivot [stop raising rates or even cut them]?”
Like almost every global stock market, the S&P 500 fell quite heavily at the start of 2022 and, having started the year at around 4,800, it is now trading at 3,800*. But in sterling terms at least, it has fared better than most other developed markets and is currently down 5%**.
“The market may still have another leg lower,” said James. “We’ve yet to see earnings expectations really revised down enough to reflect a likely recession, but it’s hard to call a bottom. Now is probably not a bad time to start buying for very long-term investors and they could pound cost average in, if the market goes lower.”
“We’ve seen a severe drawdown in technology companies this year too, although some of the bigger names like Apple have held up well,” said James. “We like big tech for the long term, and we think the market is being short-termist.
“Technology is not going anywhere. Big tech is highly profitable and cash generative and now looks like a great time to pick up bargains on a 10-year view. The ad market may continue to weaken with the economy, which may continue to hurt Meta, Alphabet and Amazon, but we just see this as a long-term buying opportunity. Some of these companies have fortress balance sheets with billions in cash.”
While US large and mega cap stocks have dominated investment returns for the past few years, US small and mid-caps have been outperforming large caps since the end of January 2022. This is unusual in a period of recessionary fears, but “partially reflects much cheaper valuations,” according to Bob Kaynor, manager of the Schroder US Mid Cap fund. “There could be signs that a new cycle of small cap leadership has already started,” he said.
The stability of the US economy relative to other countries in the world means that it has been more resilient and, even though the stock market has fallen, it is still trading at a valuation premium to other regions and Europe in particular.
“The more domestically-focused US small and mid-caps, however, are not excessively valued,” Bob continued. “They offer diversified exposure to the broad economy. Many of these companies don’t have to look overseas for growth, and so are to a degree insulated from the rising geopolitical tensions which look set to reshape global alliances, trade, and investment flows. In fact, a number of these companies could be direct beneficiaries of a more regionalised world economy as US authorities are incentivising manufacturers to “reshore” operations.”
He also added that given the size of the US economy, even “small” US-focused companies are large by international standards – a fact that is important at a time when investors are rediscovering risk, as liquidity tightens due to rising interest rates, triggering a range of stresses.
“When it comes to smaller companies, they have the advantage that they aren’t as negatively impacted by the strong dollar, so for this reason they’ve done quite well,” added James. “The US economy has also been a lot stronger than the rest of the world.
“That said, I would actually prefer large caps at the moment heading into a recession. I’d be looking for things to start getting less bad before I allocated more money to small and mid-caps.”
Funds to consider depending on which part of the US market you prefer:
Investors wanting to invest in the big tech companies now prices have fallen may like to consider this unconstrained multi-cap fund. The manager has been running it since 2007 and has been specialising in technology stocks since 1998. The investment universe includes all traditional technology sub-sectors, but the manager’s flexible approach also allows investments in companies where technology is providing a significant competitive advantage.
Those favouring a more diverse portfolio of larger companies could consider this fund, which invests in large US firms that demonstrate innovation and change. Experienced manager Taymour Tamaddon collaborates with the T. Rowe Price analyst team to find these names, the best of which he will back with strong conviction. Taymour’s past experience has given him excellent insight and access to some of the world’s leading companies.
As the name suggests, this fund has a flexible strategy, with a bias to value but also looking for growth opportunities. The manager mainly seeks out undervalued medium-to-large improving businesses, which reward the fund with good liquidity and decent growth prospects. He invests in a wide universe of US stocks and has a low turnover. Companies with management change offer particular appeal.
Finally, those preferring to invest in America’s smaller companies could consider this fund. The overall shape of the portfolio will reflect the manager’s view of the US economy. Investing mainly in US small caps, but also with a tilt to mid-caps, he uses multiple sources of information to generate ideas and to validate and test candidate companies for investment.
Research all FundCalibre’s Elite Rated US equity funds here.
*Source: Yahoo Finance, 9 November 2022
**Source: FE fundinfo, total returns in sterling, 31 December 2021 to 8 November 2022
Photo by Luke Stackpoole on Unsplash