In a telling indication of just how infatuated investors have become with a handful of fast-growing tech companies, Apple Inc. is now worth as much as the entire British stock market index.
On its own, the iPhone maker would rank as the world’s fourth-largest stock market, behind only the United States, Japan and China and considerably ahead of Canada. But investors shouldn’t expect this apparently absurd situation to unwind any time soon, according to Robert Buckland, global strategist at Citigroup.
It will take broader economic shifts, notably a move away from rock-bottom interest rates, to make investors reliably prefer broad assortments of value-priced stocks to the shares of a few high-growth superstars such as Apple, he argued in a note on Monday.
The time for investors to switch wholesale out of growth stocks such as Apple and into value stocks “will not come until the global rate cycle turns. That moment could still be some time away,” he wrote.
It can’t happen soon enough for many value investors. These bargain hunters, who prowl for deals in cheap, unloved companies, have lagged behind growth investors for many years now.
The past few months have been particularly painful for value investors. They have watched many of their favourite shares slump at the same time as a handful of growth stars have surged ahead.
In January, for instance, Apple sported only half the market capitalization of the FTSE 100 Index, which spans the 100 biggest companies on the London Stock Exchange. Today, Apple and the FTSE 100 are worth much the same – roughly US$2-trillion each.
The valuations on the two investments, though, are very different.
Big gains in Apple’s share price since the start of the year have propelled it into extremely expensive territory. It now trades for 29 times its estimated earnings. That is double the price of the assorted retailers, banks, miners and energy companies that populate the FTSE 100.
Apple also pays a much lower dividend – 0.8 per cent compared with 4.3 per cent for the FTSE. Even if you adjust for the tech giant’s much faster growth rate, the FTSE still looks to be a considerably cheaper proposition, according to Mr. Buckland’s calculations.
However, despite this valuation gap, he argues there is little reason to expect British stocks – or value investments in general – to pick up speed until more fundamental change takes place.
The FTSE 100 and other value investments will “only start to sustainably outperform when real yields start to rise,” he wrote. “This could occur if the global economy accelerates, inflation expectations increase and markets price in higher rates.”
In such an environment, sales and profit growth would become more common across a broad swath of companies, which would reduce the motivation for investors to pay stratospheric prices for a handful of high-growth businesses such as Apple.
Meanwhile, higher real yields on bonds would compete for investors' affection and make those investors less tolerant of high-growth stocks that typically pay only meagre dividends.
Higher yields would also boost bank profits by increasing the margins on loans. Since bank stocks make up a large part of many value portfolios these days, this would provide an additional boost for value investors.
The problem for value investors is that this promised land of higher yields still seems a long way off. While economic growth and inflationary expectations may accelerate in coming months, central banks have made it clear they won’t raise rates until a recovery is in full swing.
For now, investors may want to hedge their bets, Mr. Buckland says.
Given the political clouds overhead – including controversy around a possible no-deal Brexit at year-end and a U.S. presidential election that could result in increased scrutiny of tech companies – it makes sense to be well diversified. If you can’t decide between the growth potential of Apple and the cheap value appeal of British stocks, owning both might be your best bet, he suggests.
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