Great Expectations

  • 07 Aug 2020
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Great Expectations

There are so many factors that influence the economy and investment markets, but the most important factor is how much cash an investment generates.  For companies this is profit, while property provides rent (net of costs). If we think income will grow faster in the future, we pay more for the asset now. If we feel very uncertain about the future, we pay less.

At Intralink it has now been many years since we made the decision to focus on the US with an extra allocation to technology. The “Big 5” US tech firms (Apple, Amazon, Microsoft, Google and Facebook) had clear competitive advantages. They were not cheap on a current earnings basis, but they were very attractive given the amazing quality of these companies and the potential earnings growth.

History usually shows us that when companies get to the top, they find it hard to stay there. They do not like change and they certainly do not want to incur big expenses to disrupt the comfortable industry position they are in. These incumbents get chipped away at over time by more dynamic, innovative businesses.

That has never been the approach of the “Big 5”, who are always innovating and rather than the leader coming back to the field over time, they are extending their lead. It appears only a very heavy regulatory hand can stop them.

Brendan Waller

The following chart shows the big 5 vs the rest of the US market (the other 495 of the S&P 500 index).

We had seen large share price increases leading into their results and the “Big 5” reported and beat the very elevated expectations. We believe in taking profits as it reduces risk and encourages a buy low and sell high attitude. However great things look for these businesses, they are more expensive than they were and life is not certain e.g. government regulatory actions, so taking profits while maintaining significant exposure is the most prudent way to invest. 

For further information or to discuss how we can help you, please speak to your adviser.