A deep Fangs bite could be painful for global stock markets

FANGS, the group nickname for Facebook, Amazon, Netflix and Google shares, have been wild performers this year. Adding Apple and Microsoft to the foursome, the market capitalisation of the stocks comes to an astounding US$3 trillion. If the tech and new media group fall for any reason, the impact could be global. Their market cap is now higher than the entire values of the German and French stock markets, according to exchange data. The level of the fashionable six shares is only US$1 trillion lower than the market cap of all shares traded on the historic London stock exchange. With the exception of China and Hong Kong, their total market value far exceeds individual Asian stock markets, including Singapore.

Hedge funds and other fund managers have poured money into these stocks and thus have record overweight holdings in technology, according to nine-year data of BOA/Merrill Lynch. The buying momentum caused their prices to soar this year. So much so their boom accounted for more than a third of the S&P 500 year to date gains of 8 per cent. To be sure, if all high-flying tech and media stocks were excluded from the S&P, the index’s gains would be a mere one per cent.

In the first six months of this year, Amazon raced upwards, gaining 34 per cent; Facebook soared by 34 per cent; Apple by 34 per cent; Netflix by 33 per cent; Google’s Alphabet shares by 25 per cent and Microsoft by 16 per cent. Such have been the gains that several analysts are becoming worried that the share prices have overrun earnings prospects by a wide margin. According to Schwab, the US brokers, the current price earnings (PE) ratio of Amazon peers far into the distant future at an astounding 189, with a one year estimated forward PE of 154; Netflix’s PE is a mind boggling 217 and forward estimate 158; Facebook, 38 and forward estimate 32; Google, 32 with a forward PE of 29; and Microsoft 32 and forward PE 24. Against those values, Apple is relatively cheap with a current PE of 18 and forward estimate of 17. Historically, the Wall Street crowd becomes exceedingly nervous if earnings fail to meet expectations and if price earnings ratios are high, there is very little room for mistakes.

The big question is why would a possible eventual slide of a small group of stocks have global financial implications? The answer is that the market capitalisation of Wall Street has reached US$25.4 trillion, far higher than the next biggest – notably Japan at US$7.4 trillion, China at US$5.8 trillion and the UK at US4.1 trillion. The new media and tech boom has made the US stock market the sixth most overvalued in the world, according to StarCapital’s cyclically adjusted price earnings (Cape) ratios. Cape is the valuation invention of Robert J Shiller, winner of the Nobel Prize for Economics. It measures the ratio of the current market price to the average inflation-adjusted profits of the 10 preceding years.

According to this guideline, only the relatively tiny markets of Denmark, Belgium, Philippines, Indonesia and Ireland are more overvalued that the US, which at the end of March had a Cape of 27.5 and average PE of 22.7

According to Norbert Keimling, head of StarCapital, based near Frankfurt, Germany, the Cape measures whether the valuation of an equity market is high or low compared with its average earnings level. When Cape is low, returns are higher over the long run and when it is high, returns are much lower or poor. The least expensive markets in terms of Cape are Russia, South Korea, China and Italy, while Singapore is also regarded as relatively good value. The problem, however, is that a tech bubble implosion in the past, for example the year 2,000, tended to bring down the entire American market. This would be even more likely in the current market climate as trillions of investor cash have gravitated to exchange traded funds that place money in the S&P 500, Nasdaq and other stock market indices. Since the US is such a significant market, Wall Street can cough and smaller markets around the world can choke. The hope is that the media and tech bubble – from whatever eventual size – will shrink slowly rather than burst.

© Copyright Neil Behrmann

This article was first published in The Business Times, Singapore

Jack of Diamonds, the sequel to Trader Jack- The Story of Jack Miner will be published in early this year. Neil is also author of anti-war children’s novel Butterfly Battle- The Story of the Great Insect War.  The updated 2015 Waterloo commemoration version of Butterfly Battle is on Kindle and e-books. Reviews are on neilbehrmann.net and Amazon and more reviews are welcome. If the books are purchased direct on this site, a proportion of the proceeds will go to low cost charities

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