Seldom have so many owed so much to so few. No, I am not talking about the brave British fighter pilots who resisted the German air attacks on the UK during World War 2, but about a small group of companies that have helped ensure the US continues to be one of the absolutely best performing equity markets.
The five digital giants Microsoft, Apple, Amazon, Alphabet (Google) and Facebook epitomise the digital age and the new habits we have acquired since the dawn of the new millennium, and via their strong business models they currently account for around 21% of the S&P 500 index, which includes 500 of the biggest listed companies in the US. Never before have the five biggest companies in the S&P 500 index made up so large a share of the index – the previous record was set in 2000, when Microsoft, GE, Cisco, Intel and WalMart accounted for around 18% of the S&P 500.
In recent years, this digital fivesome has accounted for an ever increasing share of the index as the global frontrunners for a new generation of digital companies, and our tackling of the coronavirus by means of lockdowns and social distancing has only given many digital companies a further boost.
Stay-at-home companies, in other words companies that allow us to work, shop and, not least, entertain ourselves at home have rightly proved particularly robust in recent months. Equity prices for many of these companies have fared noticeably better during the corona crisis than the market in general – Amazon’s share price, for example, has in fact risen. In the shorter term, however, this could potentially present them with something of a challenge equity price-wise. The explanation for this is as follows:
Many equities in, for example, the financial, industrial and oil sectors have been dealt a severe blow by the corona crisis, as the economic slowdown has hit them harder and so they now constitute a lesser share of many investors’ portfolios than was the case just a few months ago. That is also why we have seen investors flock to these equities in recent weeks on days when the financial markets are marked by optimism about the coronavirus pandemic and the imminent reopening of the world’s economies – and this trend may well be reinforced later this year.
At Danske Bank, we are expecting to see a gradual recovery in global economic activity in the course of the second half of this year, and this may further sharpen investor appetite for the hardest hit sectors, such as financials, industrials and oil, at the expense of others – including the digital companies.
But if I am expecting such a sector rotation later in the year, should I then not dampen my enthusiasm for digital and tech equities, you may ask? The short answer is no. For while there may be periods when digital companies cannot quite keep up with the market, the overall trend towards increased digitalisation is unstoppable, and as investors it is important that we are exposed to the sector.
Many of the digital habits we have acquired or reinforced during the corona crisis will doubtless linger. Many more people have had their eyes opened to the convenience of having groceries delivered to their doorstep, to how much digital home entertainment means when much of society is in closed down, and to how important it is for companies to be able to keep their businesses running without everyone being in the same room.
The best alternative – for now
As a strategist, I am constantly assessing the various investment alternatives against each other. Right now, I cannot see a more attractive long-term trend than our digital transformation, so until something else becomes obviously undervalued and has a considerably lower risk, digital equities is where I see the best opportunities for earning a higher return than the equity market in general.
But remember that nothing lasts forever – including the five digital giants’ dominance of the S&P 500 index. Looking 20 years ahead, new companies will doubtless force their way into the top echelons and become the latest price rockets, just as we have seen over the past 20 years, which is why solid, broad exposure to the equity market is always important. Once that broad base is in place, you can then try to sprinkle a few select winner on top – but remember to replace them when new candidates come knocking.
This material has been prepared for information purposes only. It does not constitute investment advice. You should always be aware that historical return and forecasts on future developments are not a reliable indicator of future return, which can be negative. Always consult with professional advisors on legal, tax, financial and other matters that may be relevant to determining the suitability and appropriateness of an investment