How do you protect investors when volatility is rife in markets? It’s a question that has increasingly been harder to answer in recent times.
The trouble is we need answers more than ever today. The past three years have been nothing short of a rollercoaster for investors with geopolitical tensions rife across the globe; a once-in-a-lifetime pandemic; recession; and the growing threat of inflation. Things have now taken a horrible turn in recent weeks with Russia’s invasion of Ukraine – with terrible consequences from a humanitarian perspective.
Negligible rates and inflation have put paid to cash and government bonds as defensive positions – the former has not been an option for more than a decade.
However, the traditional 60-40 portfolio also appears somewhat dated today – we saw a classic example of that in the sell-off in 2020, when equities and bonds became increasingly correlated, providing no cover as a result.
Even gold has suffered to a degree. Following the invasion, the share price originally soared to over $2,050/oz in early March. It has since fallen back to $1,933/oz (roughly a 6% drop).
The US 10 Year Treasury Note currently pays just over 2%, with inflation close to four times that amount. In that scenario holding money in cash is loss making every year. You have to look for opportunities – but nothing appears cheap from a valuation perspective, which brings us to the question of what is likely to be the most secure investment over the long term?
Big tech is a relative safe haven today
That brings us on to technology – an area where people feel there is now value given the recent fallback, coupled with the long-term tailwinds for the sector.
Tech was the big winner in a challenging 2020, largely thanks to the Faangs (Facebook, Apple, Amazon, Netflix and Google). In truth, they were expensive going into the Covid crisis, with questions about whether their exceptional growth was sustainable. I remember reading an article from Saracen Fund Managers back in early 2020, which showed the Faangs had collectively grown more than 350% in the preceding five years – compared to just over 150% for S&P 500 as a whole.
Perhaps what is overlooked is that they did show significant resilience during the Covid sell-off. For example, Apple closed all its retail stores and Google lost all its revenue from travel-related searches – this was shrouded by strong returns compared to many others.
I think big tech is a relative safe haven today. Businesses like Alphabet and Microsoft are large, diverse and are still experiencing high structural growth. They are generating huge amounts of cash and have extremely strong balance sheets.
They also have pricing power – if Apple decided to double the price of your device would you get rid of it? I doubt it.
These stocks have been taken down with the market, despite delivering great performance. The market loved Alphabet’s last quarter – but the share price still fell.
Apple has held up extremely well and is arguably the most vulnerable. It is expensive versus its history, but it is an incredibly strong business, and I would not bet against its long term. Amazon and Nvidia have also delivered brilliant quarters – but have seen their share prices fall due to sentiment.
Not cheap but well positioned to weather these challenging times
I recently read an article from Mid Wynd International Investment Trust manager Simon Edelsten, which highlighted the fact that these large companies can pass on price rises to customers – sidestepping the challenge of inflation – while other tech stocks which may not have that luxury have been supported by profits.
He also highlighted the fact that in the first day’s trading in the aftermath of Russia’s invasion of Ukraine, the likes of Microsoft (5%), Amazon (4.5%) and Alphabet (4%) all rose in value.
Clearly, big tech is not cheap – but these behemoths certainly look well positioned in these challenging times. There are far riskier equity investments in today’s climate – provided investors are patient.
Those wanting pure technology plays with access to some of these companies may like the Axa Framlington Global Technology fund or the Sanlam Artificial Intelligence fund. While the likes of the Capital Group New Perspective and T Rowe Price US Large Cap Growth Equity fund both have significant exposure to these businesses.
