This week, key questions from readers and viewers of my social media that caught my eye:
Is the UK market undervalued?
Relative to other markets, it does indeed look like we in the UK are lagging and have some catching up to do. A lot of unknowns, especially the virus remain.
Will Smaller Companies do Better?
Actually, data from Schroders shows that small-cap companies tend to outperform larger caps when business activity improves.
Will Big Tech Companies Maintain their Dominance?
Whilst Biden is supposed to be in favour of breaking up big tech, actually, research shows companies do not dominate for more than a decade. So the largest market caps of their era are usually overtaken – GM, AT&T, IBM, Exxon, for instance. In ten years, it is unlikely today's tech giants will all be there. I, for one, review my holdings annually and never buy and hold forever.
Is it worth holding Tech companies in my SIPP/ISA like Microsoft, Amazon, Apple?
While these giants had a great 2020, I do still hold them in my pot so far. It seems form a report on Bloomberg on 23rd January 2021 that ‘hedge funds have fallen back in love with technology giants’ too. They used data from Goldman Sachs to back this up. And they expect the big five, I own them, Amazon, Alphabet, Apple, Microsoft, Facebook all will announce fast growth too.
But isn’t the US Market Overvalued?
The famous Buffet Indicator, which measures Global Market Cap (ie, the value of companies on the stock market) against GDP ie the size of the economy as a whole, is at highs it's not seen since the global financial crisis of 2008.
So to me, it is important to pick the right stocks, the type I speak about which are resilient, because of their strong balance sheets, cash, cash flow, higher growth, and not ridiculously priced for the profits they could make.
So what has been driving stock market growth? Froth?
Actually, according to Morgan Stanley, the fundamental drive to S&P500 stock price growth has been a rise in sales and profits. Some of it has come from rising profit margins. In any given year, it is just the prospect the market puts on the company, but over time it is sales growth that is most important.
Okay, so under Biden anything to worry about?
Well, under a Democrat President, the average S&P 500 return has been 10% (less than under a Republican). But GDP ie the economy growth at 4%, more than under a Republican.
What about rising Government Debt?
Well, the US dollar is falling as the supply of dollars, and other fear factors push it lower, which would mean Emerging Market stocks should do better – Korea had a good 2020 and will probably repeat that in 2021.
The US is at 94% of debt to the size of the economy. The UK is at 104% - similar to France. Japan seems to cope on 261%!
Visit my www.campaignforamillion.com for free investing resources.
Alpesh Patel OBE