The equity markets have dramatically changed the script from last year. The technology and growth stocks that were flying all through 2020 have stalled, while the “value” companies that no one was interested in are seeing a dramatic revival. Tesla dropped from $880 a share to below $650. Spotify dropped from $350 to $270.
Overall, the tech-heavy Nasdaq index dropped by 10%, taking it into correction territory. And yet, at the same time, the wider market was hardly impacted. The more broadly based, industrial Dow index marched steadily on, hitting record highs. The two indices have not diverged so significantly since 1993.
What analysts refer to as a “great rotation” is underway: investors are taking their money out of growth companies, and putting it into value on a scale not seen for many years.
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The Zoom boom is over
It is not hard to understand why. After an epic run, many tech stocks had started to trade on crazy valuations. Covid-19 accelerated the digital economy, compressing ten years of advances into a few short months. But even so, it’s not clear that Zoom is really worth five times what it was a year ago.
At the same time, the rapid rollout of vaccination programmes in the UK and US means lockdowns should be lifted soon, and massive stimulus programmes, again led by the US, means economies should bounce back strongly. The result? Lots of companies in basic, traditional industries should witness a rapid recovery. Airlines, retailers, banks, property firms, manufacturers, and food and drink companies, should all be doing a lot better.
Every major index has plenty of “value” companies on it, but one stands out: Britain’s FTSE 100 (Germany’s Dax comes a close second). Indeed, you have to look pretty hard to find anything that looks like a technology company in it at all: Rightmove, Just Eat and Ocado are the only three, and two of them are in food delivery, which is at the more basic end of the spectrum.
Other than that, it’s all banks, miners, oil companies, drugs conglomerates, and consumer-goods giants. In other words, the FTSE is primarily a “value” index, with a high dividend yield and plenty of cash flow, but not a lot in the way of excitement.
For the last 20 years that has condemned it to a terrible performance. It is still below the high it reached in 1999, while every other major rival is way above it. If it had simply kept up with the S&P 500 it would be over 15,000 by now. If it had kept up with the Dax it would be over 12,000.
Sure, it has been weighed down by a host of factors. Brexit definitely didn’t help, nor did the interminable arguments about how to get out of the EU that dominated the four years after we voted to leave. Neither did the financial crash of 2008, nor the sluggish growth that followed. Even so, the FTSE’s underperformance was largely down to the dominant sectors in it being completely out of fashion. The FTSE has performed dismally for so long that most investors have simply given up on it.
A modest target
If the “great rotation” has legs, that will start to change, and potentially very quickly. Brexit has been resolved; the vaccine roll-out is going well; the chancellor and the Bank of England have pumped massive amounts of money into the economy to keep demand alive. Perhaps most importantly of all, the FTSE’s dominant sectors are coming back into fashion.
If miners are booming once more, then in Rio Tinto and BHP Billiton, the FTSE is home to some of the largest in the world. As energy revives, it has BP and Shell. As healthcare is in vogue, it has GlaxoSmithKline and AstraZeneca. In banking, it has HSBC and Barclays. None of these are especially exciting businesses. But they are solid, reliable, pay good dividends, and will benefit from a growing, consumer-led global economy. They are all “value” stocks, and cheap ones as well.
How high could all this push the FTSE? To 10,000 by the end of the year? It is not as crazy as it would have seemed just a few months ago. If the “great rotation” keeps going, it is a modest target.
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