By Craig McAvinue – 2 February, 2023
“The best thing that happens to us is when a great company gets into temporary trouble … We want to buy them when they’re on the operating table.”
So, the first month of 2023 is behind us and it turned out to be a very positive one across the equities markets.
Data table is from Google Finance
On the currency side, as is usually the case with positive months, the US Dollar (US$) lost some of its appeal as a safe haven, resulting in generally modest drops.
Data table is from Google Finance
Growth for the fourth quarter in the US was 2.9%, well ahead of expectations. The elephant in the room for much of 2022 – inflation – also saw positive movement, coming in at just 6.5%. This represents the sixth month in a row of decreases and the lowest rate since October 2021. Based on this data, aggressive interest rate hikes should and likely will be put on hold. This in turn should discourage investors from holding cash and encourage market investment, where the growth potential lies.
In addition to the markets mentioned above, the Nasdaq Stock Market impacts on many portfolios. Comprising 3,600 companies, with Technology being heavily weighted at 48%, Nasdaq has seen tremendous growth, but also massive losses when times are tough like last year.
In January, the Nasdaq was up 11.5%, the largest January gain in 23 years. Giant businesses rule this market. Jim Cramer of CNBC, whether you love him or loathe him, certainly has a presence when it comes to how the markets are viewed, having coined the phrase FAANG (Facebook, Apple, Amazon, Netflix, Google). Actively managed funds and exchange traded funds (ETFs) alike were created to follow the performance of these companies. For many years during the bull market, investors regularly made excellent gains with these holdings, but in many cases a lot of those gains were wiped off in 2022.
As name changes occurred with Google and Facebook now trading as Alphabet and Meta respectively, and with Netflix being relegated in place of Microsoft, Cramer renamed this sub-sector MAMAA (Meta, Apple, Microsoft, Amazon, Alphabet).
These five giants represent five of the top eight companies in the Nasdaq and have a total market capitalization of nearly seven trillion US$.
Stock markets can be emotional places and those who are able to remove emotion from their investment decisions are the ones who most often succeed. The key to gaining long term capital growth is looking at the quality of the underlying business and its potential to grow in the future.
Currently the largest of these MAMAA components is Apple, and what a giant it is. Despite recent falls in its share price, the business still increased its revenue in 2022 by US$29 billion to a whopping US$394 billion. To put that into perspective, that is nearly US$45 million an hour. For the time it’s taken you to read this update, based on 2022 revenue, Apple would have made US$3 million – and that number will grow this year, and the year after and the year after that … you get the picture.
Facebook (Meta), despite its fall in share price, gained another 39 million users in 2022. That is approximately the population of Australia, New Zealand and Switzerland combined.
The driver for this growth is developing economies. Living in the world we do, it’s difficult to comprehend that 36% of the world’s population, nearly 3 billion people, still have no internet access.
This will continue to change as urbanization continues and Frontier markets become Emerging, and in turn Emerging markets become Developed. Those living in rural areas who currently have no internet access will soon have access. Conversely, the number of people who are currently online who choose to disconnect can probably be counted on one hand.
So who will benefit from this? MAMAA. All these companies developing world market share will grow as more and more people get online and clamor for these tools.
Yes, some of those 2022 falls were downright horrible. Good management would have seen some gains taken at some point in the preceding five years and reinvested in non-correlated areas. When looking at equities, a five-year time horizon is a fair benchmark; in my view, growth in these businesses is inevitable during that timeframe.
Even looking at the last five years, your average return on MAMAA was 106%, because these are what Buffet calls great companies. Are they on the operating table today? Maybe not, but it’s easy to make the case that they probably have a cold that makes them undervalued …
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