Regular readers of this blog will be familiar with the term FAANG which is an acronym for the US tech giants Facebook, Amazon, Apple, Nextflix and Google (Alphabet). Recently Microsoft has been added to the ranks which of course totally ruins it as I, for one, cannot now pronounce the new acronym! It reminds me of my previous attempts at learning Chinese which left me tongue-tied and feeling like a failed linguist.
At times like this, the inexorable march of the Tech Giants appears unstoppable however this is precisely when it pays to take stock and ask yourself will this latest investment trend continue and, if so, at the same rate of growth? You see I have experienced may investment trends and fads over the years and, in my experience, nothing lasts forever. Even great technology companies have their day. Remember the rise and fall of IBM which was replaced by Microsoft then Microsoft’s decline when Apple’s business model overtook theirs? Of course in this latter case, Microsoft is now making a stirring comeback but I would venture to suggest it is the exception that proves the rule. Clayton Christensen’s brilliant book The Innovator’s Dilemma explains how and why great companies fail due to new technologies.
So why should I doubt further dominance by these 6 great companies? After all of these companies do account for most of the time the average person in the West spends his day and night. Their future dominance is assured, isn’t it? Well, I have learned from bitter experience that once I am certain about something in the investment world I am proven wrong time and time again and I am not the only one. The irrationality of investors and stock markets never ceases to amaze me but maybe they shouldn’t. After all, we are all emotional beings and decisions are driven primarily by emotion rather than logic.
The future challenges these Tech Giants will face are summarised below;
- Ever-increasing government regulation and scrutiny.
- Increasing taxation specifically targeted at such companies.
- The threat of break up to prevent their monopoly powers.
- Increasing fines by regulators.
- Threats of legal action.
- Competition from an existing competitor or a new one especially with a new technology or innovation.
Think this will never happen? Well, think again. All six of these threats are already happening in one form or another and the incidence of these threats is highly likely to continue.
Take the example of monopoly power. Monopolies have been broken up before by the US government. Take the case of Standard Oil which was created by the great oil magnate William Rockefeller. Its history as one of the world’s first and largest multinational corporations ended in 1911, when the U.S. Supreme Court ruled, in a landmark case, thatStandard Oilwas an illegalmonopoly.
These companies are adept at paying minimal taxation by use of clever lawyers and tax specialists by playing the game of transfer pricing by shifting their profits to countries with the most benign tax regimes. Governments worldwide don’t like it and are increasingly taking action against it.
The owners of the computer games Fortnite, Epic Games, are taking Apple to court in May next year claiming that Apple is unfairly profiting from its monopoly power in charging a 30% fee on its app purchases as exorbitant.
These are just three examples of ways in which these Tech Giants will increasingly find their dominance being reduced as monopolies are fundamentally unhealthy for a competitive economy to thrive.
Furthermore, the values of these companies have become so high that together they represent a disproportionate percentage of US stock market indices which is distorting such measures.
In spite of my comments the CCM Intelligent Wealth Fund currently owns shares in 3 of these 6 companies i.e. Amazon, Alphabet (Google) and Microsoft. For now, we feel their business models are secure but as soon as we have evidence their powers may become seriously eroded we will sell these holdings.
As mentioned in my last blog I fully expect a large correction of the US stock market probably in the next six months though nobody knows if or when this will happen. This is not only because of the over-valuation of these Tech Giants but also the ludicrously over-valued shares in companies such as Moderna, Kodak and Tesla.
The CCM Intelligent Wealth Fund is well-positioned to take advantage of such market weakness when it does occur because of our cautious strategy of investing about 15% of the fund in gold ETFs and cash or cash equivalents as well as mostly under-valued small and mid-cap stocks. If the US stock market does have a large fall we will be buying many excellent quality shares at very discounted prices.
Most of the shares in our fund I would describe as value stocks. History shows that when emerging from recession such stocks always outperform growth stocks. So when we start to emerge from the economic malaise caused by the coronavirus lockdown I am very confident that our fund will thrive.
Presently our fund is under-performing our prescribed benchmark, the global index, which is heavily invested in large US companies especially the tech giants. However, our fund has substantially outperformed the UK stock market for the year to date. even though this isn’t the official benchmark of the fund which is the global index *. The CCM Intelligent Wealth fund appears to be poorly managed but it isn’t. We are simply being patient and accepting short-term underperformance because we don’t want to get caught out when the bubble finally bursts. As Warren Buffet once said, “Only when thetidegoes out do you discover who’s been swimming naked?”
We believe in buying high-quality under-valued shares in the seven themes of the fund. We refuse to overpay for shares so we do not invest in shares which are in a bubble such as Tesla. You know it makes sense**.
* 1-year performance: 1.17% according to FE analytics
1- year FTSE All-Share Index -14.89%
**The value of investments and the income from them may fall as well as rise. Consequently, you may not receive back the amount originally invested. This communication is for general information only and should neither be construed as constituting advice nor be relied upon in making any investment decisions nor an invitation to consider or subscribe for shares in the CCM Intelligent Wealth Fund. You are recommended to seek competent professional advice before taking any action. Any statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs’ practice. Levels and bases of tax relief are subject to change.
