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Mind boggling

The mass of value concentrated in America’s tech titans recalls events of the late 1980s

A seminal moment came along last week. It bore a close resemblance to another that hoved into view late in 1989. Back then, some terribly clever financial analyst came up with the notion that the Imperial Palace in downtown Tokyo – all 0.4 square miles of it – was more valuable than every brick of real estate in California, whose area runs to about 164,000 square miles.

That suggestion prompted a simple question: which would I prefer to own, the Imperial Palace, whose grounds and ornamental lakes do have an oriental charm, or all of the property sprawling across Los Angeles, crammed into San Francisco and don’t forget San Jose, San Diego and so on?

Sure, western investors were in awe of Japan’s economic miracle, additional proof of which was that, at about the same time, the stock market value of Mitsubishi (TYO:8058) topped the aggregate value of all 2,000 or so companies listed on Sydney’s Australian Securities Exchange. Even so, the real-estate question was a no-brainer. It was obvious which was preferable, as events in Japan proceeded to show.

You can see what I am driving at. Last week came the equally unreal news that America’s most valuable company, Apple (US:AAPL), had more market value than the aggregate of all the blue chips in the FTSE 100 index.

Once again, therefore, that question arises: which would I prefer to own, Apple or all 100 companies in the Footsie? A maker of mobile phones, tablets plus connected products and services operating in a crowded market where growth is lively to moderate, or the diversity, solidity, global earnings (and occasional rubbish) of the FTSE 100 index? Put another way: is it really possible that the present value of all future net cash that Apple will generate will be more than that produced by every UK blue chip, from AstraZeneca (AZN) all the way down to British Land (BLND)?

First, though, one wonders how we got here. To what extent is this mismatch in value about the genius of American capitalism, the shortcomings of the British version or something completely different? The table, Top-heavy giants, is a good starting point. It shows the woeful performance of the FTSE 100 in past couple of years. Re-basing indices to 100 at the end of 2017 (an arbitrary start point) and the Footsie has lost 25 per cent of its value while the S&P 100, its US equivalent, has gained 35 per cent. So the Footsie’s underperformance is 44 per cent, none of which we can blame on sterling’s weakness since it is back to its end-2017 rate against the dollar.

Top-heavy giants
 S&P 100Tech titans'S&P 95'FTSE 100
04-Sep-2013521810975
30-Jun-2012118410080
31-Dec-1912214811198
28-Jun-1911012510497
31-Dec-18941019288
31-Dec-17100100100100
Source: FactSet; performance indexed to 100 at 31.12.17 

More telling, perhaps, is the comparison with the ‘S&P 95’, the S&P 100 minus its five technology titans – in order of market value, Apple, Amazon (US:AMZN), Microsoft (US:MSFT), Alphabet (US:GOOGL) and Facebook (US:FB). Strip out these five and the other 95 – similar to the Footsie by diversification though with more great names – forced the FTSE 100 into a 31 per cent underperformance since end 2017.

As for those tech titans, the tables gives facts to what intuitively we know – that their share-price performance seems unreal. Put the five into their own market-weighted mini index and their value has risen 118 per cent in the past 32 months, including a 47 per cent surge in 2020.

Given the size of the US economy relative to the UK’s – about $21 trillion of annual output to $3 trillion – it might be reasonable that the aggregate value of the S&P 100 is about 10 times the value of the Footsie; ditto the relationship between Apple’s market value and that of AstraZeneca, London’s most valuable equity. But what underlines the incongruity of Apple’s value topping that of the Footsie is that the combined value of the Tech-titan five at $7.3 trillion is almost the same as the value of the FTSE 100 plus the $5.7 trillion-worth of equities listed on the Tokyo Stock Exchange. Once more, I might ask, which would I prefer to own, those five or, in effect, all of London and all of Tokyo?

Little and large
 Mkt Cap ($ trillion)
S&P 10020.5
Tech titans7.3
Apple2.1
FTSE 1002.0
AstraZeneca0.1
Source: FactSet 

Sure, there are rational reasons why the value of the titans should have surged during this most strange of years. Similarly, there are reasons why – despite their size – the five can continue to grow at their lively recent rate for years to come. All of them operate on a global scale, yet – in that context – their reach can be extended. Simultaneously, there are equally rational reasons why they are under threat. Their range of enemies – from disgruntled consumers, to regulators, to governments of all hues – is long and growing.

It was ever thus. Human ingenuity means there is never a shortage of facts and arguments to find the confirmatory bias that can justify any vested interest. That has been especially true at the height of every bull run.

What most fascinates me is the sheer concentration of stock-market value in the five titans. It is simply mind-boggling. Yet minds only stay boggled for so long.