Global and most noticeably US stocks markets have become bipolar in the V-shaped recovery from the pandemic inspired lows. On the up we have technology shares, health care shares and shares, often from these two sectors, which are positively benefiting from the stay home economy. Initially investors saw the stay home effect as being short-lived. As they increasingly suspect that some aspects of a stay home economy may lead to permanent changes in behaviour they are becoming more interested in businesses, which benefit. Obvious examples would be Netflix for at home entertainment. Zoom for video conferencing, Peleton Interactive for exercising at home, Chegg, for online education, Facebook, which is seeing sharp growth in both users and interactions, Wix.com, where demand for setting up web sites has exploded and Etsy, which has seen $133m worth of face masks sold on its platform in April alone.
Some of these effects obviously are going to be temporary as case numbers fall and lock downs ease and are completely lifted across the world. But much of the effect may stay. Video conferencing is convenient, cost-effective, good for the planet and may even lead to more productive meetings than the traditional face-to-face format, Netflix is a great way to consume entertainment, online education can be very focused and so on.
This in turn is boosting technology shares across the sector. If we are consuming more video games, boosting shares in that sector, then we need faster connections, more capacity, more and faster data centres, better video chips, a bigger cloud and better software. It is no surprise that technology shares across the board are doing well.
Health care shares are also springing to life. This is partly because of the search for a vaccine to protect everybody, the search for better testing and tracking procedures to contain the virus and the need for better treatment options for those suffering from more dangerous and even life-threatening effects of the virus. The effort is so intense, so global and attracting so much government and public funding that many companies are directly affected but it seems to go further than just Covid-19.
Health shares generally are breaking out higher, which is why I have included so many shares with Therapeutic in the name in this issue. I was amazed to find that there are some 40 shares, nearly all US-listed, which have Therapeutic in the name. Most of them are engaged in serious PhD and Nobel prize winning level research, which I find almost totally incomprehensible. They all have a distinctive approach, usually something to do with antibodies; they are targeting unmet medical needs often involving rare diseases but also futuristic strategies for personalising the approach to treating conditions such as cancer or involving the immune system.
Are we on the brink of a new era of exciting breakthroughs in medical science. I don’t pretend to know but all these companies have teams of high level employees, great pipelines of potential drugs at various stages in the obstacle course of trials needed to launch new drugs, they have raised serious amounts of equity risk capital and they have many powerful partnerships. If any of them develops a drug that goes on to become a blockbuster their valuation can increase 10-fold or even 100-fold. They are an exciting sub-section of the stock market and their lottery ticket appeal can mean that periodically a tidal wave of investment funds is attracting into the sector. We could be approaching such a moment, which is why I have featured a number of these shares in this issue.
I am generally bullish about the world that is going to follow Covid-19. I think many of the changes, the move into a more virtual, more online world with less use of planes and fossil fuel cars and transport systems could be very beneficial. At the same time it is clear that many of the industries, which are suffering are labour intensive in a way that the new technology and health care shares are not. The job destruction from Covid-19 has been terrifying and it seems likely that many jobs have been permanently lost.
This is not necessarily a worry for the stock market since higher levels of unemployment help keep cost pressures down for companies and make it easier to find people. Witness the recent success of Amazon in hiring an additional 175,000 people to cope with demand in its warehouses. Some technology companies have been hiring like mad. One of my favourites, Atlassian, which makes software to help IT workers operate in teams more effectively, said it hired a record number of employees in March alone.
There are clearly socio-political implications if more people are struggling to find jobs. In the medium to longer term though it invariably turns out that the very technology, which seems to destroy jobs ends up creating more. It also seems likely that there is going to be an explosion in self employment and people starting new businesses. This has become far easier in a more technology-intense world and people can even start addressing global markets far earlier than would have been possible for businesses in the past.
Two other things are happening in a technology driven, more globalised world that are positive for investors. First is that companies can grow to become unimaginably gigantic. There are four companies in the world that either have or have had a trillion dollar market valuation – Microsoft, Apple, Amazon and Alphabet (Google). Incredibly these businesses are by no means mature. They are still growing fast and are on paths, which could see them becoming even bigger, maybe much bigger in the future. The limits to growth seem to have become almost open-ended, especially with entrepreneurs like Elon Musk, already planning for settlements on Mars.
The second exciting development is the speed at which companies are growing. Cloud-based technology companies are not only highly scalable but are rewarded by investors for investing on a massive scale in growth by spending heavily on research and development and sales and marketing. It is very common to see companies spending well over half sales on driving growth and doing it with such success that sales are growing annually by 30, 40, 50, 100pc or more. It is a wild west world of advancing technology and raging growth out there and very exciting for investors.
It also makes for great volatility because these fast growing companies have great appeal for day traders and momentum investors who can be very skittish. One reason why the Covid-19 pandemic initially had such a devastating effect on markets is because a huge number of momentum investors were rushing for the exit at the same time. Share prices crashed dramatically until it began to dawn on people that an enforced stay-home economy was actually a boon for many technology and health care businesses. Shares in those companies then turned around and shot higher as readily as they had fallen.
Shares in other companies, often more traditional types of businesses and almost anything that involved large gatherings of people, fell hard and have mostly stayed depressed. Not only are they hurting badly from an almost total collapse in demand but there are increasing doubts about how rapidly and how completely they will recover.
Eating in restaurants is fun but also much more expensive than eating at home, having food delivered and ordering online and driving to the restaurant to make a pick up. Eating out as a routine activity may struggle to recover to past levels so we may need less restaurants. Similar arguments apply to cinema going, grocery shopping, clothes shopping and many other activities. Change was going to come to these industries; it may be that one effect of the pandemic is to accelerate this shift.
I describe current stock market conditions, especially in US stock markets, as bipolar. Technology, health care shares and companies benefiting from the stay home economy are on a high; many other companies are on a low, depressed but often with good reason.
This effect can be seen in the behaviour of the indices. The FTSE 100 and the EuroStoxx indices are full of more traditional businesses, the kind with their roots strongly in 20th century ways of doing things. They are under pressure and as a result these indices are at levels first reached in 1998. They have made no net progress in the new millennium at all.
By contrast the Nasdaq 100, heavily weighted for technology shares generally and the big tech behemoths particularly, has been racing ahead. Since January 1998 the Nasdaq 100 index has climbed from 1,046 to 9,152 currently. Never before in history have US shares, new world shares, so dramatically outperformed those of the old world. There is something about the entrepreneurial culture of the United States that seems superbly suited to a technology and globalisation driven world.
I saw it with the health care shares. Just using the key word, ‘Therapeutics’, I found 40 US-quoted shares but only one in Europe and none in the UK. Language may have a little to do with it but I suspect that weighting tells a story. In the US the private sector carries the burden for finding solutions to hard-to-treat medical problems. Outside the US it is perhaps more institutionalised and more under public sector control.
In the US a young man who wants to save the world becomes an entrepreneur, looks for venture capital funding and ends up running a quoted business. In Europe that same young man becomes a university professor. The result is (a) that I suspect more is achieved in the US and certainly (b) that US stock markets are far more dynamic and exciting for investors.
I have practically given up on Europe and don’t find many sources of enthusiasm in the UK. For me it is all about the US and technology. It Johnson could make some changes here that would be very welcome but modern Tory governments seem to be almost as state-centred as their Labour counterparts. Even reading the commentary for the Sunday Times Rich List there was a sense of hostility to successful people. Robert Watts, the journalist, who compiled the list, seems to have no idea of what is involved in running a business. When your turnover goes to nought paying the bills suddenly becomes very tricky and sacrifices have to be made by employees as well as employers otherwise the business goes bust and there are no jobs. Decent folk don’t make profits seemed to be the message. No wonder European stock markets are stuck in the mud. In the US success evokes admiration, great success, great admiration; here it just seems to inspire disapproval.
Since January the Nasdaq 100 index has traced out a deep consolidation, which could become the springboard for a new surge. At the same time competing returns on cash and bonds have dropped to virtually zero. Central banks and governments are committed to sustaining and reviving the global economy and are pouring money into stimulus programmes. If this money starts to find its way into stock markets that would be exciting, especially since an obvious home for money from all over the world is the Nasdaq market with its stunning array of exciting technology and health care shares. My guess is that the bull market that has driven the Nasdaq 100 index up ninefold from the 2009 low point is nowhere near over. These are exciting times for investors.