HAMISH MCRAE: Don’t give up on the big dividends of the past
Holiday weekends are a great time to think longer term, and on both sides of the Atlantic since Monday is Memorial Day in the United States.
America will open up, with some 37 million people likely to travel, 60% more than last year. The UK is opening up more slowly, but we can see more freedom from next month.
But the big questions about the post-Covid economy – what will be lastingly different and what will be roughly the same as before? – remain as confusing as ever. Yet they mean a lot to all of us.
The losers of the pandemic: The losers, at least in terms of investment, have been the big dividend payers of the past – banks, oil companies and old-fashioned retailers.
They are particularly important for investors. We have had 18 months where the rewards have gone to the financial winners of the chaos.
At the top are the high-tech giants of the West Coast of the United States, but there are also the niche companies that have somehow benefited from the emergency. There is of course Amazon, Apple and the other giants, but there is also BioNTech and the thousands of hopeful start-ups.
The losers, at least in terms of investment, have been the big dividend payers of the past – banks, oil companies and old-fashioned retailers.
So last year, the Nasdaq index, which includes much of high-tech America, rose 44%. The FTSE 100 index, which is weighted towards banks, insurance companies and energy companies, fell 14 percent.
Dividends slumped to just over half of the previous year with banks having no right to pay them at all and Shell shocking the market by cutting its dividend for the first time since WWII global.
Of course, the biggest growth stocks will still be good bets.
But this year, the mood has changed. The Nasdaq has been flat since February, while the Footsie, after a few stumbles that pushed it to nearly 6,400, now appears to be settling above 7,000.
Here in the UK, the strongest and possibly most successful advocate of the ‘buy from high tech America’ mantra has been Edinburgh fund manager Baillie Gifford.
He is private and undoubtedly all the more independent for that. Its most famous fund, the Scottish Mortgage Investment Trust, was started in 1909 and today has nothing to do with mortgage lending in Scotland and everything to do with supporting growth companies. Most are found in America, China and Europe. There are hardly any in the UK.
Its main holdings are Tencent, the Chinese high-tech conglomerate, Illumina, an American company that analyzes genetic variations, and ASML, a Dutch semiconductor specialist. Other big names include Amazon, pharmaceutical company Moderna, and Tesla.
It’s not really a vote for the home side, but as a politician it’s been an incredible success. At the end of March, its shares were up 90% from the previous year and its net asset value 98%.
The question now is whether this strategy will continue to be so successful. Baillie Gifford rightly points out that we need a long-term vision. Their opinion at home is that the era of oil companies and financial services companies is over – and long before the pandemic struck.
Some of the current favorites, such as Tesla, are already starting to lose ground to established manufacturers who are making many more cars, says McRae
Stock prices give a guide. Exxon’s all-time high was in 2014. Northern Rock and Royal Bank of Scotland market values slipped long before they collapsed.
If so, the outlook is troubling for many of the large companies in Footsie. It is also worrying for people whose investment strategy has been to bet on dividends.
But is it true? Let me outline the counter-argument. It is because the current period is not only exceptional, but unbearable. High-tech America is already challenged for its oligopolistic behavior and will be more tightly regulated in the future.
Some of its current favorites, like Tesla, are already starting to lose ground to established manufacturers who are making far more cars. Do you really want to take the risks of investing in China, given the possible development of a cold war with the United States?
And most importantly, maybe the inflated stocks of the high-tech world have more to do with the flow of money that central banks have created and less to do with the potential profitability of trendy companies. As interest rates return to normal levels, investment practices will return to more normal.
It looks like a bubble, inflated by the connivance of central banks. When the bubble bursts, the value of many of the current market favorites could collapse. That said, the biggest growing companies will be great long-term investments. So the moral as always: protect your bets.
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