Holiday weekends are good times to think longer, and on both sides of the Atlantic, Monday is Memorial Day in the US.
America will open up, with 37 million people expected to travel, 60 percent more than last year. Britain is opening up more slowly, but we can see more freedom from next month.
But the big questions about the post-Covid economy – what will be permanently different and what will be pretty much the same as before? – stay as enigmatic as ever. Yet they are of enormous importance to all of us.
Pandemic Losers: The losers were the big dividend payers of the past – the banks, the oil companies, and the old-style retailers
They are especially important for investors. We’ve had 18 months with the rewards going to the financial winners from the chaos.
At the forefront are the high-tech giants of the west coast of the USA, but also the specialist firms that have benefited from the emergency in one way or another. There’s Amazon, Apple, and the other giants, of course, but there’s also BioNTech and the thousands of hopeful startups.
The losers, in terms of investment at least, were the big dividend payers of the past – the banks, the oil companies, and the old-style retailers.
The Nasdaq index, which covers much of high-tech America, rose 44 percent last year. The FTSE 100 index, which is weighted by banks, insurance companies and energy companies, fell by 14 percent.
Dividends slumped to just over half last year, with banks banned from paying them at all and Shell shocking the market by cutting its dividend for the first time since World War II.
But this year the mood has changed. The Nasdaq has been flat since February, while the Footsie now appears to be above 7,000 after a few trips that pushed it to nearly 6,400.
Of course, the biggest growth stocks will still be good bets
Here in the UK, Edinburgh fund manager Baillie Gifford was the strongest and probably most successful proponent of the “Buy High-Tech America” mantra.
It is privately owned and therefore all the more independent. The most famous fund, the Scottish Mortgage Investment Trust, was launched back in 1909 and has nothing to do with mortgages in Scotland these days and anything to do with supporting growth companies. Most of them are in America, China and Europe. Hardly anyone is in Great Britain.
The largest holdings are Tencent, the Chinese high-tech conglomerate Illumina, an American company that analyzes genetic variations, and ASML, a Dutch semiconductor specialist. Other large holdings are Amazon, the pharmaceutical company Moderna and Tesla.
It’s not a big vote for the home team, but it has been amazingly successful as a policy. At the end of March, shares were up 90 percent year over year and net asset value was up 98 percent.
The question now is whether this strategy will continue to be so successful. Baillie Gifford rightly points out that this is a long view. Their home view is that the age of oil and financial services companies is over – and was over long before the pandemic broke out.
Some of the current favorites like Tesla are already losing ground to the established manufacturers who make far more cars
Stock prices provide a guide. Exxon’s all-time high was in 2014. Northern Rock and Royal Bank of Scotland’s market values fell sharply before going under.
If that’s correct, it’s a worrying prospect for many of the big companies on the Footsie. It’s also worrying for people whose investment strategy has been to rely on dividends.
But is it right? Let me outline the counter-argument. This means that the current period is not only extraordinary but also unsustainable. High-tech America is already being challenged for its oligopolistic behavior and will be more strictly regulated in the future.
Some of its current favorites, like Tesla, are already losing ground to the established manufacturers who make far more cars.
Do you really want to take the risk of investing in China, given the potential for a Cold War to develop with the US?
And most importantly, the high-tech world’s inflated values may have more to do with the flood of money created by central banks and less with the potential profitability of fashionable companies. Once interest rates return to normal, investment practice will return to normal.
This feels like a bubble inflated with the approval of the central banks. If the bubble bursts, many current market sweethearts could fall in value. However, the biggest growth companies will be big long-term investments. So the moral as always: secure your bets.
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