High Noon for Magnificent Seven
07/10/2023
October 2023 Update
| The one investment market that has confounded the professional investment industry has been the recent performance of the so-called ‘Magnificent Seven’ (M7) in the US (Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla and Meta). These techcompanies have driven nearly all of the US stockmarket index (S&P 500) this year – leading it to a 12% gain. This performance is at odds with the rest of the US market, and indeed those around the world, where valuations have moved sideways over this year. There is no doubt that it has been the weight of money through momentum and index funds (await apaper on the dangers of these); now that we are in the midst of the earnings’ season the Seven are about to meet the challenge of valuations, economics and sensibleinvestment management. Note that the last lines of the film are the words: ‘We lost. We always lose’. We have avoided these over-priced and now mature companies,where possible, that are moving into a new, more mature phase of their existence. Growth will be slow for M7 from hereon and the recent valuations hard to justify. This inevitable adjustment will be a challenge for investment markets. Coupled with the rising geopolitical tensions and the world’s economies learning to cope with interest rates that have, across the globe, risen from their protracted artificial lows to amore historically-correct level of 5.25% the outlook looks harsh. Geopolitical disorder along with the emergence of the world’s economy from the Covid lockdown has been the root cause of the rapid inflation that we have endured; central banks pulled on the interest rate lever harder than ever to suppress inflation, which has proved stickier and is more likely to be sustained. Nevertheless, central banks’ grip may have loosened a little of late, suggesting that rates are close to their peak. This is the most important signal for investment markets. Investing is about relativevalue and if one can be more certain of the relative value of cash flows from an asset tomorrow then it makes sense to buy it at the price today. Indeed, we expect equity markets, which today offer stunning value in most cornersof the globe, to perform extremely well once it is obvious that interest-rates haveplateaued. Ironically, because of the short-term geopolitical risk, we might be at that plateau now. This firm has been busy over the past six weeks meeting and challenging, in person, the investment houses that manage the funds into which our clients are invested currently, and many that you might do so in the future. Indeed, we have had over fifty such interactions and we are extremely fortunate to receive such a wealth of information and opinion. Our job is to apply this knowledge to our clients’ portfolios. It is gratifying to report that the message overall is one of optimism – not pessimism. The performance of companies in their ability to generate cash is a good as it has ever been (ignore the naysayers about the ‘broken economy’) and the relative value in the market, be it equities or bonds (but not, alas, property), is the most attractive that it has been for many, many years. In the very short term, the events in the Middle East are bound to weigh heavily on investment markets and, as I write these few words, the FTSE 100 index is off 3.5%. This might lead investors to question the wisdom of holding equities when cash (for the first time also for many, many years), provides a seemingly attractive return. Cash is an excellent short-term home but it will not create wealth. Over time, the return on cash deposits (and these are not without risk) will be less than the rate of inflation, leading to wealth destruction. Buy low and sell high – we are at or close to a low point! Finally, we have to pat ourselves on the back – Longbon & Company were awarded ‘Best Investment Advice Firm’ for 2023 by Money Marketing last month – our twelfth award or nomination. Andrew Longbon, Director For and on behalf of Longbon & Company |