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The week to Tuesday’s close saw global equity markets continue their rise despite a rise in Covid-19 infections in most countries. The rise of 1.4% was once again led by the US which rose 2.7%, propelled by the high proportion of technology stocks in that market. In contrast both the UK and Europe were weak, both falling 1.2%. 

While the continued rise of the tech titans including Facebook, Amazon, Alphabet (owner of Google), Netflix may in part be justified by higher earnings the same is not true across all the companies participating in the rally. Many are rising simply as a result of the huge flows into index tracking funds, where money is invested in proportion to the market value of a company’s shares irrespective of whether they are cheap or expensive.  That said, for as long as ever-greater inflows continue, the cost to any single investor of buying on size and ignoring valuation is low. And in these cost-conscious times there is no sign of those flows slowing. But ultimately, long-term returns are dependent on valuation when you sell and when you buy. It will matter, even if it can be ignored in the short to medium term. 

The beneficiaries of the ultra-low and even negative interest rate environment triggered by the global financial crisis and reinforced by the year’s pandemic may not be the same as the beneficiaries of any future rising trend in interest rates. In a world where an investor can elect to have an income from cash, fixed interest, equities or property whether or not a company is making a profit – providing a regular payment for the risk taken investing in it – it can be expected to matter again. Those with no profits to distribute will see valuation and their share price fall.

Today it may be hard or even ridiculous to imagine the eventual demise of the tech titans. But it is perhaps worth recalling that super-normal profits attract excess investment that in turn leads to lower than expected returns. Today’s tech boom is not going to end happily for all. They also attract attention not only from investors but from governments, reluctant to see such power aggregated in a few hands and always in need of tax income. Previous US industry titans have eventually fallen foul of this, leading to the eventual demise of companies including airlines Pan-Am, TWA and telecoms giant Bell. Regulation and competition have left Vodafone’s share price lower than it started the Century.

For now, with the pandemic still active, it is premature to worry. But as it passes and we move into the ‘new normal’ it may well be that today’s undisputed leadership of the tech titans will finally be challenged.