10/1/23, 11:32 AM MoneyWeek - 2023-08-04
20 Analysis
Happy days are here
again for equity investors
Ignore the doom-mongers, says Max King. The global bull market began in October 2022, and
there is ample scope for further gains. Is your portfoliopoised toprofit?
“Bull markets,” said legendary investor John
Templeton, “are born on pessimism, grow on
scepticism, mature on optimism and die on euphoria.”
The equity bull market started in October 2022 and
is well under way, although it is further advanced in
the US. Market sages are in denial, having warned of
a recession that would dent stocks, but it has failed to
appear. Ed Yardeni of Yardeni Research likens them
to Vladimir and Estragon, the characters “waiting for
Godot” in Samuel Beckett’s play. Godot never turns up.
The sceptics point to the narrow base of the bull
market. The “MegaCap-8” of the US market (Apple,
Amazon, Alphabet, Microsoft, Meta, Nvidia, Netflix
and Tesla) fell by 41% in 2022, but have since rebounded
by 64%, so their share of the S&P 500 index has risen
from 19% to 27%. The S&P 500 has climbed by 17%
this year, but only by 5.5% without the MegaCap-8.
The forward earnings multiple of the MegaCap-8
has risen to 31 times, still short of the 38 reached in
2020, but up from 21 at the start of the year. This has
propelled the multiple of the whole US market from 15
at the October low to 19.6. But the multiple for the rest
of the S&P 500 has risen only moderately to 16.7. The
forward multiple of the mid-cap S&P 400 index is only
14.1. The small-cap S&P 600 is on just 13.7.
The sceptics say the MegaCap-8’s performance is
entirely driven by artificial-intelligence (AI) mania, a
bubble waiting to burst. In truth the surge is mostly due
to the actions taken in 2022 to reduce costs, streamline
their companies and focus on profits. The sceptics may
also be dismissing the impact of AI too readily.
Investment guru Ken Fisher shrugs off concerns
about poor market breadth. “This is normal as you
move to new all-time market highs. It is also normal
for the stocks that got hurt the most on the way down,
as in 2022, to bounce the most in the subsequent bull
market.” Robust earnings growth is bringing multiples
down, with both first- and second-quarter US earnings
ahead of expectations.
European growth lags behind
 The European and UK markets have rallied less and
their valuations are lower – but GDP growth is lower
and likely to remain so. In addition, GDP growth feeds
into profit growth more easily in the US than in the UK
or Europe. America’s higher valuation is thus supported
by structurally faster growth in earnings.
The UK and Europe might benefit if there was
a preference for “value” investing over “growth”.
“Just 4% of But Ron Tabbouche of RIT Capital argues that
“the expansion of earnings multiples, driven by
stocks have lower interest rates, accounted for most of the 12%
accounted annualised return of equities in the last ten years,
with rising margins, helped by globalisation, also a
for all of the significant factor”. Now, growth in revenues is needed
US equity “to drive returns”.
Higher interest rates and bond yields than have been
market’s seen in the past 15 years have held markets back, but
gains in the won’t necessarily continue to do so. Equities performed
well in the 1980s and 1990s against such a background
last century” as the high cost of debt constrained productivity-
11 August 2023
https://www.yumpu.com/news/en/issue/163551-moneyweek-2023-08-04/read?page=21
sapping government spending. Still, markets don’t go
up in a straight line, and a setback is always possible.
Almost inevitable is a change of gear in which the sha
that led the market up initially take a breather and ne
leaders emerge. This makes now a good time to review
portfolio, taking some profits in the winners, selling t
lame ducks and buying into some stocks left behind.
An old adage advises investors to “run your winne
and sell your losers”. But anyone who did so two year
ago would have held on to all their growth shares and
sold their value stocks; last autumn they would have
done the opposite. Both trades would have been a
mistake. Another adage is to “buy low, sell high”, yet
buying low can be like trying to catch a falling knife
while shares that are high can climb higher still.
Only 4% of the companies listed account for all of
the US equity market’s gains since 1926. Just 90 of
24,000 have made up half. Owning any of these but
selling too early would have been a mistake. “Nobod
ever went broke taking a profit” goes the saying. The
riposte is that they went broke reinvesting in a loser.
So there are no simple rules to follow about when t
buy or sell. Purging the losers in a portfolio has merit
investors worry more about losses than profits, but th
risk of selling a loser is that it will then bounce back. I
best to make an active decision: either sell or double u
When it comes to new investments, it is tempting t
buy a share that has fallen a long way as it’s easier to
believe that a share price that has halved can double
than to believe one that has doubled can double again
The latter is more common. As this year’s huge rebou
of the MegaCap-8 demonstrates, if you don’t buy
quality growth shares when they are temporarily out
favour, you probably never will. Cheap shares can wa
Cash and government bonds
Bank deposit rates and the yield on government bond
are the highest for 15 years. But resist the temptation
– those yields do not look nearly so attractive when
inflation and taxation are taken into account. Besides
the appetite of professional investors for bonds will h
been dulled by the savage bear market of the
months, which ended a 40-year bull market.
past 18
Polar Capital Technology (LSE: PCT) and
Allianz Technology (LSE: ATT) trusts
Those who held on to these in defiance of the consens
that the sector had further to fall have good reason
to feel smug. The shares still trade on double-digit
discounts to net asset value (NAV), the bears are still
denial and their capitulation lies ahead. Still, it’s hard
believe that the MegaCap-8 will continue to outperfo
and there are plenty of attractive alternative investme
opportunities. This suggests some profit-taking.
Scottish Mortgage Investment Trust
(LSE: SMT)
The shares have more than halved from their early
2021 peak and a premium to NAV has turned into
a 16% discount. Yet the share price has been rising
steadily since May, the NAV is up by 8% this year an
moneyweek.c
1/2
10/1/23, 11:32 AM MoneyWeek - 2023-08-04
20 Analysis
Happy days are here
again for equity investors
Ignore the doom-mongers, says Max King. The global bull market began in October 2022, and
there is ample scope for further gains. Is your portfoliopoised toprofit?
“Bull markets,” said legendary investor John
Templeton, “are born on pessimism, grow on
scepticism, mature on optimism and die on euphoria.”
The equity bull market started in October 2022 and
is well under way, although it is further advanced in
the US. Market sages are in denial, having warned of
a recession that would dent stocks, but it has failed to
appear. Ed Yardeni of Yardeni Research likens them
to Vladimir and Estragon, the characters “waiting for
Godot” in Samuel Beckett’s play. Godot never turns up.
The sceptics point to the narrow base of the bull
market. The “MegaCap-8” of the US market (Apple,
Amazon, Alphabet, Microsoft, Meta, Nvidia, Netflix
and Tesla) fell by 41% in 2022, but have since rebounded
by 64%, so their share of the S&P 500 index has risen
from 19% to 27%. The S&P 500 has climbed by 17%
this year, but only by 5.5% without the MegaCap-8.
The forward earnings multiple of the MegaCap-8
has risen to 31 times, still short of the 38 reached in
2020, but up from 21 at the start of the year. This has
propelled the multiple of the whole US market from 15
at the October low to 19.6. But the multiple for the rest
of the S&P 500 has risen only moderately to 16.7. The
forward multiple of the mid-cap S&P 400 index is only
14.1. The small-cap S&P 600 is on just 13.7.
The sceptics say the MegaCap-8’s performance is
entirely driven by artificial-intelligence (AI) mania, a
bubble waiting to burst. In truth the surge is mostly due
to the actions taken in 2022 to reduce costs, streamline
their companies and focus on profits. The sceptics may
also be dismissing the impact of AI too readily.
Investment guru Ken Fisher shrugs off concerns
about poor market breadth. “This is normal as you
move to new all-time market highs. It is also normal
for the stocks that got hurt the most on the way down,
as in 2022, to bounce the most in the subsequent bull
market.” Robust earnings growth is bringing multiples
down, with both first- and second-quarter US earnings
ahead of expectations.
European growth lags behind
 The European and UK markets have rallied less and
their valuations are lower – but GDP growth is lower
and likely to remain so. In addition, GDP growth feeds
into profit growth more easily in the US than in the UK
or Europe. America’s higher valuation is thus supported
by structurally faster growth in earnings.
The UK and Europe might benefit if there was
a preference for “value” investing over “growth”.
“Just 4% of But Ron Tabbouche of RIT Capital argues that
“the expansion of earnings multiples, driven by
stocks have lower interest rates, accounted for most of the 12%
accounted annualised return of equities in the last ten years,
with rising margins, helped by globalisation, also a
for all of the significant factor”. Now, growth in revenues is needed
US equity “to drive returns”.
Higher interest rates and bond yields than have been
market’s seen in the past 15 years have held markets back, but
gains in the won’t necessarily continue to do so. Equities performed
well in the 1980s and 1990s against such a background
last century” as the high cost of debt constrained productivity-
11 August 2023
https://www.yumpu.com/news/en/issue/163551-moneyweek-2023-08-04/read?page=21
sapping government spending. Still, markets don’t go
up in a straight line, and a setback is always possible.
Almost inevitable is a change of gear in which the sha
that led the market up initially take a breather and ne
leaders emerge. This makes now a good time to review
portfolio, taking some profits in the winners, selling t
lame ducks and buying into some stocks left behind.
An old adage advises investors to “run your winne
and sell your losers”. But anyone who did so two year
ago would have held on to all their growth shares and
sold their value stocks; last autumn they would have
done the opposite. Both trades would have been a
mistake. Another adage is to “buy low, sell high”, yet
buying low can be like trying to catch a falling knife
while shares that are high can climb higher still.
Only 4% of the companies listed account for all of
the US equity market’s gains since 1926. Just 90 of
24,000 have made up half. Owning any of these but
selling too early would have been a mistake. “Nobod
ever went broke taking a profit” goes the saying. The
riposte is that they went broke reinvesting in a loser.
So there are no simple rules to follow about when t
buy or sell. Purging the losers in a portfolio has merit
investors worry more about losses than profits, but th
risk of selling a loser is that it will then bounce back. I
best to make an active decision: either sell or double u
When it comes to new investments, it is tempting t
buy a share that has fallen a long way as it’s easier to
believe that a share price that has halved can double
than to believe one that has doubled can double again
The latter is more common. As this year’s huge rebou
of the MegaCap-8 demonstrates, if you don’t buy
quality growth shares when they are temporarily out
favour, you probably never will. Cheap shares can wa
Cash and government bonds
Bank deposit rates and the yield on government bond
are the highest for 15 years. But resist the temptation
– those yields do not look nearly so attractive when
inflation and taxation are taken into account. Besides
the appetite of professional investors for bonds will h
been dulled by the savage bear market of the
months, which ended a 40-year bull market.
past 18
Polar Capital Technology (LSE: PCT) and
Allianz Technology (LSE: ATT) trusts
Those who held on to these in defiance of the consens
that the sector had further to fall have good reason
to feel smug. The shares still trade on double-digit
discounts to net asset value (NAV), the bears are still
denial and their capitulation lies ahead. Still, it’s hard
believe that the MegaCap-8 will continue to outperfo
and there are plenty of attractive alternative investme
opportunities. This suggests some profit-taking.
Scottish Mortgage Investment Trust
(LSE: SMT)
The shares have more than halved from their early
2021 peak and a premium to NAV has turned into
a 16% discount. Yet the share price has been rising
steadily since May, the NAV is up by 8% this year an
moneyweek.c
2/2