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Back in January, we wrote our outlook for the year entitled THE DEATH OF GROWTH INVESTING – AN OUTLOOK FOR 2022. In that outlook, we highlighted the dichotomy in the market where the largest five companies had held the index up whilst stocks that had little to no earnings had fallen significantly.  We went on to note that “Interest rate rises will test valuations of the large companies at some point this year but it may take a rate hike or two to get there. Ultimately, there appears to be a shift away from Growth investing to Value investing occurring. Boring businesses with real assets are starting to come back in vogue. The transition isn’t complete yet…”

Now we believe the transition is complete. The FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) which held the market up have turned. After drifting south for much of the year, their share prices have fallen sharply on the back of the latest earnings season. Year to date, the returns have been dismal:

 • Meta Platforms (Facebook): -73.2%

 • Apple: – 20.3%

 • Amazon: -45.9%

 • Netflix: -54.3%

 • Alphabet (Google): -40.0%

Other notable names include Microsoft down 34.2% and Tesla down 46.3%.

The key driver has been the increase in interest rates and the expectation of a Fed induced economic downturn. There are also some company specific issues at play such as Mark Zuckerberg’s insistence on spending billions of dollars developing the “Metaverse” whilst their advertising revenues have fallen largely due to the actions of Apple. This has led to Meta or Facebook being the worst performer of the group.

These falls, whilst not surprising, represent a change in regime for the market. Through the ZIRP (“Zero Interest Rate Policy”) era, investors got used to shares always going up. A lot of this was driven by an attitude that became known as TINA (“There Is No Alternative”), which suggested that due to the non-existent returns in the bond market and cash that the only place to invest was equities. Now with US ten year bond yields at 4.1% and term deposit rates also hitting decent levels, there are alternatives. This means that investors aren’t forced into riskier asset classes.

Whilst the last twelve months have been painful for investors, the outlook is starting to improve. The falls in the stocks above, as well as the falls in the unprofitable space that we wrote about at start of the year, are signs of a healthy market. This is because the market finally cares about valuations. The below chart from FactSet shows the normalization in the trailing 12 month P/E ratio.

Whilst we have no idea whether the market has further to fall, we are more comfortable investing now than at any point over the last few years. That is as long as we are investing in companies with real cashflow and real businesses.

By no means are we calling the bottom of the market. We still believe that the Tech sector in particular could fall further and the economic outlook remains uncertain as we wrote about back in May (IS THERE A RECESSION LOOMING?). As a result we don’t expect markets to recover rapidly anytime soon. However, opportunities are presenting themselves and companies with resilient profits and cashflows will be rewarded. This is what a normal market looks like. For those who have been holding off in the expectation of lower prices, then perhaps it is time to consider putting your toe in. In addition, with the high US dollar, it is perhaps also time to consider international markets with multinational companies trading at discounts to their US peers.

If you wish to discuss markets, your portfolio or our investment options please contact Guy Carson at [email protected]. Alternatively, fill out a contact form and a member of our team will get back to you as soon as possible. Contact Us.

Disclaimer: The above contains the opinion of the author and is for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice

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