For those of us of a certain age, these are days with distinct echoes of times past. And if that doesn’t simultaneously both worry you, and excite you with a sense of opportunity, then you haven’t been paying attention.
On 30 April, when J. Sainsbury (LSE: SBRY) announced its tie-up with rival Asda, almost a dozen other giant mergers were announced on the other side of the Atlantic, taking the day’s total takeover activity to $120bn. All told, this year’s takeover frenzy amounts to $1.7 trillion, according to the Financial Times.
And for another interesting data point, consider the dizzy rise of investment trust Scottish Mortgage (LSE: SMT), where the share price reached an all-time peak at the same time. The explanation isn’t difficult to find. Just look at the trust’s largest holdings: Amazon, Tesla, Alibaba, Baidu, and Tencent, and so on.
Put another way, we’ve been here before.
What goes up…
As my colleague Owain Bennallack pointed out the other day, the UK has now chalked up the third-longest period of expansion since the end of the Second World War. The dark days of the financial crisis are almost a decade ago so, at some point, that expansion will come to an end.
Over in the US, the yield curve looks to be close to inverting, pointing to long-term interest rates being lower than short-term rates. This doesn’t happen often, and it doesn’t always herald a recession. But every United States recession since 1955 has been preceded by a yield curve inversion.
And what Owain could also have added was that American markets, and to some extent London as well, are seeing high levels of volatility. Take the wild oscillations in Wall Street’s VIX ‘fear index’ in February, for instance.
Technology and ‘new economy’ stocks at record highs, yield curves inverting, mega-mergers (anyone remember the $165bn AOL-Time Warner tie-up?), market volatility, and a long-overdue contraction: does this sound like the final weeks of 1999, and the end of the dotcom boom?
… can also go down
On 30 December 1999, the FTSE 100 hit an intraday of high 6,951 before closing at 6,930. We didn’t know it at the time, but that was the start of the dotcom crash.
Markets sank, and sank again, until the FTSE bottomed out at 3,287 on 12 March 2003.
And when the carnage stopped, a lot of big names had gone under, and a lot of share prices and market valuations had cratered. Time Warner’s merger with AOL, for instance, had seen a $99bn write-off, and been scathingly summed-up as ‘the worst corporate mistake in history’.
Fortunes were lost. It wasn’t pretty.
Where the value really was
But fortunes were also made. Because while the late 1990s had seen oceans of hot money-chasing tech stocks, solid boring businesses were left unregarded, stagnating at rock-bottom valuations while investors waited for them to go bust – which, of course, they didn’t.
Bricks and mortar retailers? How quaint. Solid engineering companies, with bulging order books? But doesn’t everyone know that the future is the Internet? Tobacco companies? No: Internet stocks such as Webvan and Boo.com (which were both soon to implode, incidentally) were considered much better bets.
Canny investors, among them Warren Buffett and Neil Woodford, hoovered up such unloved businesses, attracted by solid cash flows (which were reassuringly positive, not negative), rock-bottom valuations, and decent business models that weren’t built upon quicksand.
Here we go again
I can’t help but think that we’re seeing something similar today. Contrast the exuberance seen in some quarters of the stock market today, with the disdain shown towards some stocks.
GlaxoSmithKline (LSE: GSK), for instance. British American Tobacco (LSE: BATS). National Grid (LSE: NG). HSBC (LSE: HSBA). Legal & General (LSE: LGEN).
Each and every one of these businesses have something in common: they are currently sitting on a forward yield well north of 5%.
For income investors, it’s a feast. Nor is it a famine for growth investors: the likes of GlaxoSmithKline and HSBC may not be stellar growth prospects, but I expect them to carry on motoring along for many more years to come.
And if you take the view that these unloved businesses are likely due for a re-rating, then the kick upwards in their share prices could be sizeable.
What to do?
At this point, I’ll echo Owain’s conclusions, having trodden a slightly different path to get to roughly the same conclusion.
In short, if you’re not thinking about repositioning your portfolio in light of the above, then perhaps you should be.
