What’s the deal with NASDAQ, gold, fintech and ESG?
The saying, “May you live in interesting times” couldn’t be more appropriate to describe what the investment world has looked like over the past six months. To help make sense of some of the more prominent themes that have emerged, we checked in with Research Analyst, Sameer Amin for a snapshot on four topics that are on the minds of many investors today.
These days, people seem more interested in the NASDAQ than the S&P500 and DOW Jones. Why is that and what’s your take on each?
In the U.S., there are three major indices which provide a basic signal of how specific markets perform during the day. First, we need to understand the difference between them since they’re all used as a benchmark for the U.S. Equity market.
The DOW Jones is the oldest as well as the most publicized of the three, and was created in 1896 by Wall Street Journal. It’s a price–weighted index that tracks 30 large cap stocks listed on the NYSE (New York Stock Exchange). The S&P500 was created by Standard and Poor’s in 1957, and tracks the 500 largest companies trading on the NYSE. This benchmark constitutes approximately 80% of the market of U.S. Equities, and is typically used to measure the health of the overall U.S. stock market and economy. Finally, the NASDAQ is both an index and an electronic exchange, and was created in 1985 in order to primarily track the technology sector.
Let’s focus on the index rather than the exchange. The index consists of over 3000 market cap-weighted stocks which are mostly made up of technology and internet-related companies. The Dow Jones and the NASDAQ are impacted by an individual stock’s performance since the top 10 stocks comprise more than 50% of their value. On the contrary, the S&P500 is a diversified index, where the top 10 stocks carry a total weight of approximately half of the former mentioned.
The reason why people are interested in the NASDAQ over the S&P500 and the Dow Jones is because the last decade has witnessed remarkable growth in the technology sector, which has widened the performance gap between the S&P500 and the Dow Jones (See chart 1).
The same holds true during 1999 and 2000, when the dot com bubble forced a surge in technology stocks. During this time, the NASDAQ rose tenfold whereas the S&P500 and the Dow Jones only gained 11% each. When the bubble burst, the NASDAQ fell by 67% in comparison to 23% for the S&P500, and only 13% for the Dow Jones.
We’re currently undergoing unprecedented times, where technology stocks have provided coronavirus-proof stocks amidst this lockdown. In addition, the NASDAQ also maintains a higher exposure in biotechnology that is spearheading the Covid-19 antibody and vaccine research. It is important to note that if any of these stocks are successful in the effective treatment of the virus, we can be looking at exponential growth.
Furthermore, the FAANGM (Facebook, Amazon, Apple, Netflix, Google and Microsoft) stocks also have a major part to play as they have risen in multiples over the last decade. Although these stocks are in each of the indices, it’s their weighted average that creates a significant difference. For instance, these six stocks account for approximately 46% of the NASDAQ, and are approximately half of that in weighting when it comes to the Dow Jones and the S&P500.
The NASDAQ offers higher volatility because of its significant exposure to high-growth tech stocks, but it’s easily the best performer in the past decade and is expected to maintain its leading position going forward. The S&P500 represents the U.S. economy, but it also constitutes sectors that have been destroyed by this lockdown recession which, in turn, offsets the growth in other sectors. The Dow Jones is the least volatile as it consists of blue chip companies and does not represent new market opportunities along with early-stage fast growing companies.
In uncertain times, gold is often looked to as a safe haven for investors. Does that wisdom prevail or is there another investment people should be setting their sights on in such times?
Unlike paper currency, gold is a precious metal that has maintained its value throughout the ages. Although the price of gold can be volatile in the short term, it has always maintained its value over the long term horizon.
Gold serves as a hedge against inflation combined with the erosion of major currencies in order to reduce the risk in their portfolio. When the Federal Reserve announces more money printing, which will inevitably cause inflation, investors will decrease their equity exposure and increase their exposure to gold in order to preserve their wealth. For instance, when the value of the U.S. Dollar falls against other global currencies as it has done recently, people often flock to gold which in turn raises gold prices.
At the beginning of this year, the price of an ounce of gold was around $1500 USD and it has since risen by 25% to approximately $2000 USD. Gold retains its value in times of financial volatility and uncertainty deeming it the crisis commodity. Furthermore, gold has a negative correlation to the equity markets. When the stock market crashes, gold has historically risen and outperformed the market (See chart 2).
You are not alone when it comes to this strategy. Recently, even the likes of Warren Buffett, who is not a fan of gold because it has no earnings and does not pay a dividend, also decided to invest over $500 million in a gold mining company and added it to the Berkshire equity portfolio. Gold deserves to be treated like other asset classes in a portfolio and investors should question its sizing more often than its inclusion.
Biotech and fintech continue to rise in popularity, but are still largely not well understood. What themes or important trends do you see in this area right now?
First, let’s define the two. Biotechnology is any technological application that uses biological systems, living organisms or derivatives to make or modify products. Financial technology, often referred to as fintech, is the innovative technology which aims to compete and disrupt traditional financial methods in the realm of financial services.
According to a report by Grand View Research Inc., the global biotechnology size is expected to reach $727 Billion USD by 2025 at a CAGR (Compound Annual Growth Rate) of 7.4%. There’s an emergence of key themes in the market that is expected to drive growth in this lucrative industry. These key themes include regenerative medicine and genetics in diagnostics. The presence of companies exploring the development of regenerative therapies, combined with technological advancements pertaining to the penetration of artificial intelligence via machine learning, will fuel progress in avenues such as cancer and clinical trials.
In addition, the funding from governments into various research and development programs such as DNA sequencing, Nano-biotechnology and tissue regeneration has broadened their growth spectrum into applications ranging from Health, Industrial Processing, Bioinformatics and Food & Agriculture.
Fintech has advanced in many ways in areas such as real estate, cross-border payments and peer-to-peer lending. Growth in venture capital, investor interest and private equity investment are all factors that have helped fuel innovation and investment in the fintech industry. According to KPMG, the U.S. market experienced a significant increase from $29 Billion in 2017 to $54 Billion in 2018. This trend will continue to increase because of the rise of artificial intelligence and automation, which have become subsectors of the industry.
Covid has impacted people in many ways – both personally and professionally. As a result, have you seen changes in their investment behaviour, such as showing greater interest in ethical investing or the medical sciences?
The battle against Covid has made the importance of health care highly significant. In the short term, there’s been a rise in the weighting of the U.S. Equity healthcare sector, which has been spurred by the virus. And in the aftermath of Covid, this continues to be the best performing sector of all as investors demand progress on a coronavirus vaccine.
For instance, in the U.S. market, the health care sector in the S&P500 had a 10-year annualized return of 14.63% in comparison to a return of 11.69% overall return from the S&P500. The same is the case when you compare the Indian and Australian markets, where the health care sector outperforms relative to its benchmark.
Investors also seem to be shifting towards socially conscious companies that are following the ESG (Environment, Social, Governance) criteria. We recently experienced a boom in the embracement of electric vehicles and solar energy. For instance, Tesla and Nio witnessed a surge in their share price as investor demand shifted towards electric vehicles, meanwhile the oil and energy markets plummeted with oversupply and minimal demand. Also, according to a report by JPMorgan, there’s been a rise in ESG investments because investors are looking to reduce their exposure to commodity-heavy sectors in order to protect themselves from the downside risk from the collapse of oil prices. Keeping long-term sustainability in mind, risks are likely to increase in the aftermath of Covid, which should be a positive catalyst for ESG.
This opinion is shared by 55% of survey respondents of a JP Morgan investor survey which polled investors from 50 global institutions (See Chart 3). According to Morningstar, sustainable funds outperformed in the first quarter because all ESG index funds were underweight energy which, in turn, strengthens the rationale for investing in ESG strategies.
source: JP Morgan
Covid or not, the markets will always find ways to surprise you. So consider your long-term investment plan as being like a surgical mask for your portfolio: most experts agree that there’s a pretty darn good chance it will protect you.
This article was published in Leon Frazer & Associates Strategies newsletter, September 2020 edition. Read the full edition here.