HAMISH MCRAE: Investing in firms that make profits and pay dividends is healthier than investing in assets with nothing tangible behind them at all
Has the great rotation begun? That’s the phrase given to the idea that investors will switch out of the shares of high-tech companies, including the giants of the West Coast of America, and back into the solid, less glamorous corporations that used to dominate global investment portfolios.
The answer is that so far this year that is indeed what seems to be happening. Remember the stories about Apple becoming the world’s first three trillion dollar company? Well, it was for a few hours at the beginning of the year but now it is valued at $2.7trillion, down 9 per cent so far this year. Amazon is down 14 per cent, while Alphabet, parent of Google, is down 10 per cent.
Three of the most feted enterprises, Netflix, Peloton and Tesla, have been particularly hard hit. Their shares are down 34 per cent, 24 per cent, and 11 per cent respectively. If you want to take a UK-based measure of what is happening to global high-tech investment, the best-known is Scottish Mortgage Investment Trust. Its shares on Friday were down 17 per cent on the year to date.
Great rotation?: Are investors switching out of the shares of high-tech companies and back into the solid, less glamorous corporations that used to dominate global investment portfolios
Now look at the less-fashionable giants on this side of the Atlantic. Shell, which technically becomes a fully-British company when it moves its headquarters from The Hague to London tomorrow, is up 11 per cent so far this year. BP is up 16 per cent, and HSBC is up 13 per cent.
True, we are only three weeks into the year, and you always expect some sort of reaction after a heady period such as we had in 2021. But this has been quite brutal for high-tech investors, and pretty good for those who have stayed with solid, profitable companies that pay decent dividends. That is likely to benefit the UK market. In 2020, more than half of the FTSE100 index members cut, suspended or cancelled their dividends. Now payouts are slowly recovering. They are not yet back to 2019 levels and won’t be for a couple of years yet.
Broker AJ Bell thinks that the FTSE100 will yield 4.1 per cent this year, with payouts much the same as in 2021 of some £83billion. That compares with £62billion in 2020, so as far as dividends are concerned we are seeing a decent recovery but nothing to be wildly excited about.
But this is not the time for excitement. The rotation out of high-tech and into the solid, boring companies that make the stuff and provide the services we all use every day is a reaction against the froth of last year.
Credit is going to become tighter, bond yields are going to rise – and the prices of fixed-interest securities, which move inversely to those yields will fall. If that bumps UK share prices in general, that is fine too.
Meanwhile, getting a dividend yield of 4 per cent, plus some protection against inflation, is not a bad prospect at all.
So see this great rotation, which I do think is really happening, not simply as a reaction against the excesses of the past couple of years. It is certainly that, but it is also a return to common sense in investment more generally. The high-tech companies that are highly profitable, including Apple and Amazon, will go on attracting investor support. The ones that have been over-hyped will struggle. The months ahead are going to be bumpy as the central banks are forced by rising inflation to tighten policies.
But an investment scene where people invest in companies that make profits and pay dividends is fundamentally healthier than one where they invest in assets that have nothing tangible behind them at all. Yes, I am thinking of Bitcoin, which by the way is down by about a fifth so far this year.
How bad will inflation get?
That is the issue on everyone’s minds right now, and it is small comfort that consumer prices are rising even faster in the US than here.
What worries me is less how high inflation peaks and more where it will stick when it comes back down. Fund manager Tacit Investment Management put the point succinctly in a letter to clients last week when it said that ‘4 per cent is likely to be the new 2 per cent’.
In other words, the central banks will argue they will keep a longterm target of 2 per cent inflation, but because there have been several years of below-target price increases they can allow higher inflation for some years ahead. If inflation settles at, say, 2.5 per cent, that would be fine. If 4 per cent, that would be bad news indeed.