Beware the Magnificent Seven
GLOBAL investors have become too dependent on the Magnificent Seven. That’s nothing to do with the great 1960 Hollywood movie, and all to do with the US tech giants and the end of cheap money.
The Seven are: Apple, Microsoft, Alphabet (Google’s parent), Amazon, Nvidia, Tesla and Meta – that’s the new name for Facebook.
Together, they make up a quarter of all US equities by value. As they have done very well so far, that accounts for nearly all the rise in American share prices this year.
Without them, US shares would have been flat, or even down a bit, as they have been in the UK.
Since many British shareholders have a stake in the seven, either directly or indirectly, it has rescued investors’ portfolios on this side of the Atlantic too.
So what is happening now? This is the big reporting season, and the shares have been jumping all over the place as their results come out. There have been disappointments, especially from Tesla and Alphabet, but also from Meta. On the other hand there have been decent results from Microsoft and Amazon. We have to wait until this coming week to learn how Apple has done, and we get results from Nvidia next month.
What worries me is not whether big tech America is meeting the high expectations of the analysts, but rather the febrile response to a few numbers, or a few words about performance when the results are announced.
This is a twitchy market, and it reminds me of the end of the 1990s, when everyone was trying to get to grips with the long-term investment implications of the dot-com boom.
Investors have an alternative now. They can buy bonds. Until a couple of years ago the yield on bonds was so absurdly low that the main buyers were those forced by regulations to do so. Now, if you can get 5 per cent risk-free on tenyear US treasury notes, or 4.5 per cent on gilts here, maybe you should take some of the profits on your big tech holdings and think of bonds. The yields on corporate bonds have similarly climbed.
True, bond yields may climb further, but we must be close to the turning point in short-term interest rates. I can’t see any point in the Bank of England increasing its base rate this week, because the economy is slowing anyway and the rise in bond yields has done the tightening job that the Bank was tardy in doing. In any case, as argued here before, there is also real value in the solid giant enterprises around the world that supply our daily needs.
In the US, Exxon-Mobil is on a price/earnings ratio of 8.5. Shell is on seven. In the banks our NatWest is on a p/e of just over five.
If you have reservations about the oil industry or our banks (and I think many of us have reservations about NatWest) there is Unilever on a price/earnings ratio of 13.5. The ratio of the FTSE 100 index is about 11, way below the mid-teens historical average.
Remember, the Footsie is not really about the UK economy, for three-quarters of its earnings are generated abroad. It is a sterlingbased bet on the world economy that has underperformed badly for structural reasons we all know about: the relentless disinvestment by UK institutions in Britishbased companies over 25 years.
So what’s next? Come back to the Magnificent Seven. They are bundled together as an investment concept, but actually they are rather different.
Microsoft and Apple look broadly similar but they make their money in different ways. Apple remains dependent on one brilliant product, the iPhone, though it is diversifying into various services. Microsoft is more broadly based, selling services to businesses. Windows, where is all began, represents quite a small proportion of its revenues now.
We all know about Tesla, Facebook, Amazon and Google – all very different. Nvidia, less wellknown, has been around for 30 years but has recently been catapulted into the big-tech league by its work in artificial intelligence.
If they are very different, then the markets will increasingly differentiate between them. Hope will be less important than profits. We had one big reassessment of the valuation to be put on big-tech America, with the plunge through 2022 and then the solid recovery this year. A lot of the wealth that was destroyed has been rebuilt. But if that wealth is based on a tiny clutch of companies, it is inevitably fragile.
I’m not saying this will happen, but in that Hollywood movie, only three of the seven survived.
Apple, Tesla, Amazon, Meta – it evokes the dot-com boom