Lowes Magazine Issue 116

DOUG’S DIGEST

A market of two halves

SINCE THE ARRIVAL OF COVID-19 IN THE EARLY PART OF this year, economies around the world have suffered, with many businesses forced to close temporarily, or operate on a much reduced basis. This has, of course, affected everyone’s investment portfolios, but not every sector has suffered in the same way. In fact, some sectors have flourished. The accompanying chart shows the performance of the S&P 500 index, a measure of the biggest 500 companies in the USA, since the start of 2020, measured in dollar terms. To the end of September this index had risen 5.13%, in sharp contrast to the FTSE 100 index, a measure of the biggest 100 companies in the UK, which was down 20.21% in sterling terms over the same period. Yet the United States has suffered from coronavirus the same as we have in the UK, so why is there such a marked difference? Well, the main difference is the companies that make up the different indices, or more importantly the sectors and industries they are in. Also shown on the chart is the companies within the S&P 500 which operate in the Internet Retail industry. To the end of September these companies were up an impressive 60% since the start of the year, and that was despite falling back from their high point of almost 80% up at the start of September. A similar story exists for companies involved in Home Improvement Retail, which as a sector was up just over 32% for the same period. This is not surprising when we think about it. As the coronavirus took hold and people found themselves unable to go to work, go to shops, or to socialise, they instead turned to the internet for their shopping and passed their time on those decorating and DIY projects that they had been putting off. For these winners though, there were of course losers, and the chart also shows the Energy sector within the S&P 500 and those investment companies investing in office space. These didn’t fair anywhere near as well, down over the year nearly 49% and 28% respectively. Again, not really surprising as people travelled less and also discovered they could work just as well at home as in the office, if not better in some cases.

It was the technology companies in the US that

really drove the returns of the S&P 500 into positive territory though not just because of their performance but also because of their size. The seven big technology stocks: Facebook, Apple, Netflix, Google,

Microsoft, Amazon and Nvidia (collectively often known by the acronym FANGMAN), together are worth over $8.6 trillion and account for about 25% of the entire S&P 500. It was their positive performance alone that dragged the S&P 500 into positive territory. It is this reason also why the FTSE 100 has lagged its US counterpart. Whilst the UK leads in many sectors it has little in the way of technology companies, and certainly not to the dominant effect of the US. So does this mean we should all be moving our investments to the US? Well, no. As the last month of the chart shows with the fall in the Internet Retail stocks, what goes up can also come down. Just because the big technology companies have seen such steep rises this year does not mean that will continue. Especially with the possibility of Joe Biden winning the Presidential race in November. Mr Biden has already made it clear that he feels that these companies have too much power and also need to be paying more in the way of taxes. So, if he were to win the election it is likely to be detrimental to the value of these companies. Instead, as we always advocate, investors should look to a diversified investment portfolio, made up of actively managed funds where the fund manager has the flexibility to choose those companies that they believe will be the winners not just in the current conditions but also over the longer term, whilst avoiding those which are facing strong economic headwinds. Perhaps more importantly though, is to fully understand what it is we are investing in, so our investment returns are not at the mercy of the fortunes of just a handful of companies.

S&P 500 and key constituent sectors Dec 19 to Sept 20

100

S&P 500 S&P 500 Internet Retail S&P 500 Home Improvement

80

S&P Office REIT’s S&P 500 Energy

60

40

20

0

% return

-20

-40

-60

Sources: Performance data – FE Analytics. FANGMAN company data – Yahoo Finance.

-80

Dec 19

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Mar 20

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Lowes Financial Management is authorised and regulated by the Financial Conduct Authority. Visit: www.Lowes.co.uk | Call: 0191 281 8811 | Email: enquiry@Lowes.co.uk