The world of investments is constantly changing – mirroring and exaggerating shifts in the shape of the global economy. Whereas 40 years ago energy stocks dominated the list of the world’s 10 largest companies, today seven of the top 10 are technology businesses. From a portfolio perspective, historically, the smart move was to be underweight in the biggest names. While the case for ‘this time is different’ is strong – today’s tech leaders are seemingly natural monopolies – history shows that this logic seldom works. Something will have to give.
Over the past four decades, the list of the world’s 10 largest companies has changed several times, with returns generally favouring an exit at the top.
In 1980, six of the global top 10 public companies by value were energy companies like Exxon and Shell. A third of the broader index was made up of energy stocks.
By 1990, eight of the top 10 stocks were Japanese, of which six were banks. At that time, Japan accounted for 45% of the MSCI World index by market capitalisation. A decade later in 2000, NTT was the only Japanese company to remain on the list, then dominated by technology, media and telecom (TMT) stocks such as General Electric, Cisco and Intel.
Fast forward another 10 years to 2010, when it was ‘China trade’ that had the upper hand, with investors paying up for resource companies supplying China, such as ExxonMobil, BHP Billiton and PetroChina.
At each of these junctions, hindsight shows that the prudent move was to defy conventional wisdom and be underweight in the largest names – despite the fact that on each occasion, the market happily justified the high prices for such stocks based on prevailing conditions.
Today, seven of the world’s 10 largest companies are tech businesses – the top five being Apple, Google, Microsoft, Amazon and Facebook. None of these companies was publicly listed in 1980, and four of the top 10 weren’t public as late as 2000! South African heavyweight Naspers, which now has a market capitalisation of R1.1 trillion, was worth ‘only’ R2 billion in 2002.
Looking at today’s tech leaders, the case for ‘this time is different’ is strong: these companies are seemingly natural monopolies, without the diminishing returns to scale typical of businesses selling physical goods. Barriers to entry appear insurmountable. It should be noted, however, that history has not been kind to those saying ‘this time will be different’.
In our South African portfolios, we own Naspers, which is driven by Tencent, the world’s seventh largest company, while our UK-based international funds hold Microsoft, Google and Tencent. Valuations appear reasonable given the growth prospects, cash flows are excellent and balance sheets are strong – Apple has net cash of around US$250 billion.
The greatest danger for natural monopolies is being broken up by legislation, just as Standard Oil and Bell Telephone Company were in 1911 and 1982 respectively. The problem for regulators is that Facebook, for example, exists solely as a network to connect people around the world, and it doesn’t charge users. The solution may lie in patents having shorter terms, and/or changes to tax laws. Irrespective, mergers and acquisitions will be constrained.
The rise of index-based tracker funds further changes the investment dynamic, with global assets held by such funds up 500 times in the past 20 years from US$8 billion in 1997 to US$4 trillion today. Such funds invest according to market capitalisation, and inflows therefore simply fuel the rise of the largest index constituents.
As we head towards the end of the decade, it’s difficult to imagine who the next winners could be, or if the pattern up to now will be repeated. Rather, our focus remains on adhering to our tried-and-tested investment process and philosophy. By keeping an eye open for potential pitfalls, we’ll be better equipped to avoid them.
