Posted inFSA Spy

The FSA Spy market buzz – 8 March 2024

Magnificent 7 leveraged, Janus Henderson, S&P 500's power, Bob Farrell, DJ's Spiva data, Charlei Munger....

Spy was in Singapore this week and could not avoid Taylor Swift mania, even if he wanted to. All around the Lion City, he spotted people dressed in bizarre outfits, revelling in their fandom of the pop world’s most recognisable icon. Singapore’s decision to subsidise Taylor’s six concerts, in exchange for exclusivity, has paid off magnificently with buoyant hotel and restaurant sales. Any sour grapes from other Asian countries at Singapore’s audacity, should swiftly (no pun intended) be dismissed for what they are: the bleating of an unimaginative and entitled bunch of bureaucrats and politicians. It is a highly intelligent way to bring in tourist dollars.

It was only a matter of time, reckons Spy. If the daily returns of the Magnificent Seven are simply not juicy enough, Roundhill Investments is providing a tactical Daily 2x Long Magnificent Seven ETF (MAGX) for investors to easily double up their exposure. These extraordinary companies now have an approximate value of more than $13trn – a market cap that exceeds the entire value of the stock markets of Japan, France and the UK combined. If one is a little sceptical that this situation will carry on indefinitely, Roundhill is also providing a short version, The Roundhill Daily Inverse Magnificent Seven ETF (MAGQ) for those who have the icy-cold courage to jump into sell-offs.

Spy is rather more impressed with Janus Henderson (and admittedly quite a number of other managers), who are actively looking beyond the Magnificent Seven for different ideas to capitalise on the rise of the AI-driven economy. In an insight piece out this week the Anglo-American manager is urging investors to think about companies that help produce the chips that drive the AI semi-conductor industry forward. One example given is Dutch firm ASML, that “dominates within lithography, a process of using light to print patterns on silicon. In fact, the largest chip makers depend on ASML for the machinery that enables lithography for advanced chips, giving the firm an estimated market share of more than 80%.” Another example would be Taiwan Semiconductor Manufacturing Company (TSMC), the world’s largest foundry.  TSMC has a roughly 50% global market share of chip manufacturing and is expected to grow its AI-related revenues, which are currently only 6% of their total, at “50% per year for the next five years”. Nice work if you can get it.

It is hard to overestimate what a wealth generator the S&P 500 is. It is now 15 years since the market bottomed after the Great Financial Crisis, which was the most vicious bear market in 80 years. Since then, the bellwether index has rallied by 10 times, generating a 16.7% annualised return for investors. What is interesting, to Spy anyway, is that if one had invested in the S&P 500 in October 2007, the peak before the ensuing crash (and you held your nerve), you would still be up a respectable 357%, which is nearly 10% annualised. 

Are companies any better than individual investors at buying low and selling high? Spy sees no evidence of it. Goldman Sachs has just estimated that S&P 500 companies will buy back, for the first time, cumulatively more than $1trn of their own stocks this year. This will happen with many of their share prices trading at near record highs.

Bob Farrell, a talented technical analyst (some say legendary) who built his career at Merrill Lynch used to say, “There are no new eras – excesses are never permanent.” His point was that there will always be a hot group of stocks every few years, but the speculation fads do not last forever.  To prove this point, Spy took a look at a chart of the 10 largest companies around the world at the beginning of each decade since 1980. Leadership seldom carries from one decade to another. Even since 2020 the guard has been changing with Alibaba, Berkshire Hathaway and Tencent no longer in that list.

It is well understood by most wealth managers that active managers seldom outperform their benchmarks over longer periods of time, reckons Spy. Dow Jones has been producing its SPIVA scorecards for a while, which measure the over or under performance of the active managers. In the debate between active and passive, people tend to focus on large-cap comparisons, where, for example, over the last year, 60% of funds underperformed the S&P 500 and 40.32% of funds outperformed. That number gets significantly more dire over 15 years, with 88% under performance. These types of results are not just confined to a well-developed market such as the US, but replicate with varying levels of intensity, across the globe in Canada, Mexico, Brazil, Chile, Europe, MENA, South Africa, India, Japan and Australia. A casual look through the data suggests that the most likely areas for active managers to outperform is small cap stocks in emerging markets but that is sadly only true in the short term.

Spy’s quote of the week comes from the ever reliable, and now sadly late, Charlie Munger. “There is no better teacher than history in determining the future. There are answers worth billions of dollars in a 30-dollar history book.”

Until next week…

Part of the Mark Allen Group.