Welcome to your February monthly market outlook from atomos
In December, the share price of technology giant Apple hit a new record high, meaning its market capitalisation is now larger than that of France. And Italy. In fact, there are only six countries in the world that have a gross domestic product larger than Apple’s market value.
Past performance is not a reliable indicator of future returns and capital is at risk.
Market capitalisation (or market cap) is calculated by multiplying the total number of a stock market-listed company’s shares by the current share price. If you combine the market capitalisation of Apple with Amazon and Microsoft, these three stocks almost equal the value of all the stocks in three major economies – Japan, the UK and France.
The sheer size of these companies and their contribution to global equity markets must give investors pause for thought. With so few companies accounting for so much stock market performance, concentration risk is extremely high.
The size of three stocks in a global index almost equals all of the stocks in three major economies
Global equity markets have experienced a huge increase in stock concentration over the last decade, prompting comparisons with the dotcom bubble just before it burst in 2000. A reversal of this trend could have a major impact on stock prices.
We do expect to see greater variation in industry and stock returns in the future. Tomorrow’s winners may be in different corners of the market rather than mega-cap technology.
In these conditions, skilled active management becomes even more important. Active managers can think through the potential risks and opportunities as different groups of stocks start to outperform. For 2024-2025, we’re prioritising balanced portfolios which have a broad spread of assets that are uncorrelated to global equities, such as listed infrastructure and property. We also favour higher weighting to government bonds from developed nations.
In our Weekly newsletter late last year we wrote about concentration risk and the dominance of ‘the Magnificent Seven’ stocks in world equity markets. You can read that article here.
US Presidential Election
The race to the White House has begun, with candidates jostling to become their party’s nominee for November’s US presidential election.
The latest polls are predicting a Biden-Trump re-match. We’re seeing much speculation and heightened emotion about the implications of a Trump 2024 outcome on global markets.
Should he be re-elected, Donald Trump has implied he plans to enforce the US withdrawal from NATO. If this happens, it could lead to higher goods prices, specifically those linked to the Russia-Ukraine war such as food, fuel and fertiliser, and increased market volatility.
There could also be some short-term benefits from a market point of view, such as:
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More tax cuts for corporations;
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Increase in US oil supply boosting the energy sector;
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Pressure on the Federal Reserve leading to a short-term fall in rates.
It’s important to remember that policies, not personalities, will be what moves markets. We believe our diversified and dynamic portfolios are well prepared to weather the storms this election year could bring.
Read more on investing in an election year in our latest Weekly commentary.
Geopolitical risk revives
In an environment of heightened geopolitical risk, we are seeing increasing conflict between the US and the Houthis, a Yemeni rebel group backed by Iran. The US does not want to get into a war with Iran, but we are seeing incremental escalations here. Whether this will become more systemically important for economies and market remains to be seen.
We note that the Baltic Dry Index, which measures global shipping costs, jumped in December when the Houthis first attacked ships in the Red Sea, but has since fallen back to more average levels.
Bellwether indices like this are useful to gauge market fears or concerns and, although it is not currently ringing alarm bells, we will be watching developments closely. We retain some defensive positioning in portfolios using government bonds.
Sector in focus: Information technology
The MSCI World Information Technology sector has been the best-performing sector over the last 12 months with strong earnings growth following a year of weak returns in 2022. Services and software have performed particularly well.
At the stock level, Taiwan Semiconductor Manufacturing reported better-than-expected earnings for the fourth quarter. Optimism around developments in AI are largely responsible for expectations for future earnings and the current price of stocks in this sector.
We would caution that the size of the price return over the last year leaves IT stocks exposed to any downward revisions to earnings estimates.
With a few different situations unfolding on the global stage, we remain confident that our active management approach and well-diversified portfolios will help us navigate potential risks and explore opportunities we see.
All investment views are presented for information only and are not a personal recommendation to buy or sell. Past performance is not a reliable indicator of future returns, investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested. Any views expressed are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness by atomos. Any expressions of opinion are subject to change without notice.