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HAMISH MCRAE: Has common sense investing prevailed?

HAMISH MCRAE: Investing in companies that make profits and pay dividends is healthier than investing in assets with nothing tangible behind them

Has the great rotation begun? It’s the expression given to the idea that investors will turn away from the stocks of high-tech companies, including America’s West Coast giants, and return to the solid, less glamorous companies that dominated the portfolios of companies. global investment.

The answer is that so far this year, that is indeed what seems to be happening. Remember the stories of Apple becoming the world’s first trillion-dollar company? Well, that was for a few hours earlier this year, but now it’s valued at $2.7 trillion, down 9% so far this year. Amazon is down 14%, while Google’s parent company Alphabet is down 10%.

Three of the most popular companies, Netflix, Peloton and Tesla, were particularly affected. Their shares are down 34%, 24% and 11% respectively. If you want to take a UK-based gauge of what’s happening to global high-tech investing, the best known is Scottish Mortgage Investment Trust. Its shares on Friday were down 17% year-to-date.

Big turnover? : Are investors moving away from high-tech stocks and back to the solid, less glamorous companies that dominated global investment portfolios?

Now look at the less fashionable giants on this side of the Atlantic. Shell, which technically becomes an all-British company when it moves its headquarters from The Hague to London tomorrow, is up 11% so far this year. BP is up 16% and HSBC 13%.

Granted, we’re only three weeks out of the year, and you’re still expecting some sort of reaction after a heady period like the one we had in 2021. But it’s been pretty brutal for high-tech investors. , and pretty good for those who stuck with solid, profitable businesses that pay decent dividends. This should benefit the UK market. In 2020, more than half of the members of the FTSE100 index reduced, suspended or canceled their dividends. Now payments are slowly recovering. They have not yet returned to 2019 levels and will not be for a few years.

Broker AJ Bell believes the FTSE100 will return 4.1% this year, with payouts about the same as 2021 of around £83bn. That compares to £62bn in 2020, so when it comes to dividends, we’re seeing a decent recovery, but nothing exciting.

But now is not the time to get excited. The rotation from high tech to the solid, boring companies that make the things and provide the services we use every day is a reaction against last year’s scum.

Credit will tighten, bond yields will rise – and fixed income prices, which move inversely to those yields, will fall. If it drives up UK stock prices in general, that’s fine too.

Meanwhile, getting a 4% dividend yield, plus some inflation protection, isn’t a bad prospect at all.

So look at this big turnover, which I think is really happening, not just as a reaction to the excesses of the last two years. It is certainly that, but it is also a return to common sense in investing more generally. Highly profitable tech companies, including Apple and Amazon, will continue to attract investor support. Those who have been overhyped will struggle. The coming months will be bumpy as central banks are forced by rising inflation to tighten policies.

But an investing scene where people invest in companies that make profits and pay dividends is fundamentally healthier than one where they invest in assets that have nothing tangible behind them. Yes, I’m thinking of Bitcoin, which, by the way, is down about a fifth so far this year.

How bad will inflation be?

That’s the question on everyone’s minds right now, and it’s a small consolation that consumer prices are rising even faster in the United States than here.

What worries me is less about where inflation is peaking and more about where it will stay when it comes down. Fund manager Tacit Investment Management made the point succinctly in a letter to clients last week when it said “4% is likely to be the new 2%”.

In other words, central banks will argue that they will maintain a long-term inflation target of 2%, but because there have been several years of price increases below target, they may allow a higher inflation for a few years to come. If inflation stabilizes at, say, 2.5%, that would be good. If 4%, that would be really bad news.