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20/07/20183 mins

The Trillion Dollar Question

The World Cup may be behind us, but there’s a new game in town. And the bragging rights will be just as great – on the face of it, at least. Apple, Amazon, Alphabet and Microsoft are all vying to be the first company in history to achieve a market capitalisation of $1 trillion. Apple is leading the pack with a market cap of around $940bn, while Amazon is snapping at its heels on a little under $900bn, with Alphabet and Microsoft not far behind. The symbolic ‘$1 trillion’ mark could conceivably be reached within weeks. But is that really good news for investors?

In our view, not necessarily. When market capitalisations reach such dizzying heights, it’s time to ask questions. Is the company worth it? Can the underlying business continue to grow sustainably? And, perhaps more ominously, do these values reflect any potential pitfalls?

Take Netflix, for example. In mid-July, it reported subscriber numbers that fell a little short of market expectations. Investors made their displeasure felt, wiping $20bn from the company’s value overnight. Alphabet’s shares also fell this week, after the EU imposed an eye-watering $5bn fine on the company, due to anti-competitive practices. Alphabet’s shares bounced back, but regulation of the tech sector is escalating.

Ballooning market capitalisations also have implications for investors in passive funds. Because such funds are weighted by market cap, the fashionable benchmark heavyweights form the largest portion of the fund. So when those stocks fall from grace, passive funds are more exposed to those losses. The corollary is that the smaller, out-of-favour companies will be the least significant investments. That means investors may miss out when the fortunes of these companies improve.

As contrarian investors, it’s our job not to be dazzled by the lustre of popular, highly valued stocks. Although these technology heavyweights hog the limelight and offer great services to us as consumers, there are scores of companies that the market overlooks. These unloved stocks are exactly where we believe active management can press their advantage over passive funds. That’s why we shun the overly popular and expensive stocks in favour of the unloved. After all, all that glitters is not gold.

*As at 20 July 2018

 

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

Please note that SIT Savings Ltd is not authorised to provide advice to individual investors and nothing in this blog should be considered to be or relied upon as constituting investment advice. If you are unsure about the suitability of an investment, you should contact your financial advisor.

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