Size Matters

The stock market does love acronyms and catchy names. It started with the BRIC (Brazil, Russia, India, China), but has moved on to the largest US quoted stocks developing from the FAANGs (Facebook, Apple, Amazon, Netflix, Google), to the ‘Magnificent Seven’ (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia, Tesla). The latest is the ‘Trillion Dollar Club’ (Apple, Microsoft, Amazon, Alphabet, Tesla, Meta, Nvidia, Saudi Aramco).

Goldman Sachs came up with BRIC in 2001, so it should not be a surprise to learn that they have since come up with GRANOLAS. This is not a crunchy muesli, but an acronym for Europe’s largest companies by market value. GRANOLAS comprises Glaxo, Roche, ASML, Nestle, Novartis, Novo Norisk, L’Oreal, LVMH, AstraZeneca, SAP, and Sanofi. While GRANOLAS includes technology companies like ASML as well as European luxury brands, it mainly comprises leading pharmaceutical giants.

Does size matter? Well, from an investment perspective, it increasingly has, due to the structural shift towards passive investment, which requires scale and liquidity. As global wealth managers merge, fewer firms are managing ever-larger pools of money – and that’s a problem. If a firm manages £50bn of global assets, a 1% holding is £500m – that is bigger than many European quoted smaller companies! By comparison, the eleven companies within the GRANOLAS account for over 25% of the European stock market’s value.

For now, the Magnificent Seven, Trillion Dollar Club and the GRANOLAS will no doubt continue to attract passive investor flows, unless the AI bubble pops or central banks do not cut interest rates as fast as the market expects. However, we notice that Apple and Tesla have recently lagged the other US tech majors and the ‘Magnificent Seven’ has already been amended to the ‘Fab Five’! With Alphabet also slightly down year-to-date how long before this becomes the ‘Fab Four’?

What have we been watching?

An important week in the US with the release of the PCE deflator –the Federal Reserve’s (Fed) preferred inflation measure – the last reading before the Fed’s meeting on the 20^th March. Encouragingly, this eased very slightly to an annualised 2.8% in January from 2.9% in December. Market expectations for US interest rate cuts now appear aligned with those of the Fed. However, weaker than expected economic data raised interest rate cut hopes once again, helping the S&P 500 index to an all-time high. US equity valuations are now trading on an estimated forward earnings multiple of nearly 21x. US shares have only traded more expensively, on this basis, twice in 50-years – the peak of the tech boom and post Covid-19.

There are hopes of another temporary ceasefire/hostage exchange in Gaza although comments from both sides are not encouraging. Energy prices have remained stable helped by mild weather, but companies are continuing to highlight potential supply chain challenges which may make central bankers more cautious.

While the fighting continues in Ukraine, there are growing concerns that Putin’s focus is now turning to Ukraine’s smaller eastern neighbour, Moldova. Within its borders is the pro-Russian breakaway region of Transnistria which may call for a referendum very similar to those that the Kremlin used before the invasions of the Crimea in 2014 and Ukraine in 2022. Moldova is not a member of NATO. Meanwhile, Putin gave his annual state of the nation address in which he warned NATO against sending troops to Ukraine, saying Russia has ‘weapons that can hit your territory.’

The US ambassador to Beijing revealed that China has undertaken raids on a greater number of US firms in the country than had previously been thought. This was focused upon US consultancy and due diligence firms. These were undertaken on suspicion of espionage. Not great for US/China relations! Meanwhile, tensions between China and Taiwan remain elevated with the latest flash point being the Kinmen Islands.

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In the UK, inflationary pressures continue to ease with grocery inflation dropping to a two-year of low. In addition, with the prospect of lower interest rates, signs of life are appearing in the housing market with the Bank of England announcing a pick-up in mortgage approvals in January. Meanwhile, ahead of Wednesday’s Budget, it was reported that the Chancellor is exploring the option of scrapping the non-domiciled tax status as the government seeks tax cuts to cut the deficit in polling ahead of the general election. Unfortunately, Jeremy Hunt is constrained by his own fiscal rules which limits the amount of headroom.

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In Europe, inflation is coming down albeit not as fast as hoped. Inflation fell from 2.8% in January to 2.6% in February but this was slightly higher than expected. Core inflation was also higher than expected but did drop to 3.1%. Stickier than expected core inflation may lead the European Central Bank to delay its first interest rate cut.

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US durable goods orders were weaker than expected in January dropping by 6.1% with new orders, excluding defence down by 7.3%. ISM manufacturing and construction activity were also weaker than expected leading some economist to trim US economic growth for the first quarter from 2.4% to 2.2%.

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In Japan, inflation slowed in January but was slightly higher than expected at 2.2%. Furthermore, inflation is expected to pick up in February as the impact of government price relief measures drop out on an annualised basis. Stickier than expected inflation may lead the Bank of Japan to bring an end to its negative interest rate policy.  Japanese equities continued to rise with the NIKKEI index climbing above 40,000. 

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China’s property sector woes continue to overshadow the economy as Country Garden reported that a liquidation petition had been filed against it for missing a payment of a $205m loan. The 14^th National People’s Conference is underway this week and markets are anticipating more stimulus news. The authorities certainly have their work cut out – economic growth at a 30-year low, rising unemployment particularly amongst the younger population and a low birth rate.

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Brent oil edged up to $84 as Saudi Arabia and Russia extended their latest voluntary production cuts by a further three months. 

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Finally, talking of passive investment – a tale of two cities- New York and Brussels. Following the recent US SEC approval of Bitcoin ETFs, two members of the European Central Bank have given their view on the crypto currency. ‘For disciples, the formal approval confirms that Bitcoin investments are safe and the preceding rally is proof of an unstoppable triumph. We disagree with both claims and re-iterate that the fair value of Bitcoin is still zero. The latest approval of an ETF does not change the fact that Bitcoin is not suitable as means of payment or as an investment.’ Meanwhile US investors have been buying Bitcoin ETFs and the crypto currency is approaching an all-time high ahead of the next ‘halving’ event in mid-April. So, New York approves Bitcoin, Brussels disapproves -both can’t be right!

Read Last Week’s Alpha Bites – Where have all the flowers gone?

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Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the Financial Conduct Authority.