CROSS ASSET # INVESTMENT STRATEGY 12 THIS MONTH’S TOPIC Big Tech at the crossroads… Big Tech’s stock market performance has become more hesitant. A simple market rotation or a more durable phenomenon? With the exit from the crisis getting closer, sectors shunned during the pandemic could actually benefit from a catching-up movement. However, between its disruptive nature which is cannibalising traditional companies and interest rates which, apart from a slight increase, look set to remain durably low, Big Tech retains major advantages. Especially as its valuation is less exceptional than it seems, provided however that its profits momentum remains sustainable... Since 2015, and more particularly since Before continuing, it is worth remembering the beginning of the pandemic, Tech in that Big Tech is a new name for the famous general and Big Tech in particular have GAFAM companies (Google, Amazon, reigned supreme on the stock markets. Facebook, Apple and Microsoft). However, IBRA WANE, However, its development has been more this goes further than the traditional Senior Equity Strategist hesitant over the last few weeks (see acronym since, apart from their huge graph 1). With the prospect of the arrival market capitalisation, what characterises of a vaccine and an exit from the crisis these digital leaders is the fact that getting closer, sectors that have been the they have managed to create such a rich most adversely affected by the pandemic ecosystem that it has become difficult to could actually benefit from a catching-up do without them. And digital technology, movement. However, in the longer term, which was already extensively present in between its disruptive nature which is everyday life, has moved to a new level cannibalising traditional companies and since the pandemic and the restrictions of interest rates which, apart from a slight movement that followed. increase, look set to remain durably low, Moreover, while the two terms are often used Big Tech retains major advantages. interchangeably, since end-2018, Big Tech That said, in order for the sector to continue goes beyond the simple IT sector as defined to distinguish itself, two conditions need by the new GICS classification, which can to be confirmed. Firstly, that the Fed be a source of confusion. Currently, only does not tighten its monetary policy too Apple and Microsoft remain part of the IT quickly. And secondly, that the sector’s sector, whereas Amazon comes under the earnings capacity is not significantly Consumer Discretionary sector (Internet & altered. In the case of the Fed, on Direct Marketing sub-sector) and Google numerous occasions, it has demonstrated and Facebook the Communication Services its willingness to be patient and, unless sector (Interactive Media & Services sub- the vaccines and treatment announced sector). This distinction is a means of radically change the outlook, the horizon putting into perspective the popular in terms of interest rates, and therefore belief that Tech is necessarily expensive. equity attraction (TINA for There Is No Graph 2 shows that Tech in the broadest Alternative) and sector rotation, seems sense (IT + Google, Facebook and Amazon) to be relatively clear. However, with now accounts for 40% of the S&P vs. 35% regard to earnings issues, and therefore at the peak of the TMT bubble in 2000. valuations, numerous questions continue However, GAFAM companies account to be raised whether in terms of taxation, for 25% vs. 5% at the time. Consequently, regulations or obsolescence. IT strictly speaking excluding Apple 1/ GAFAM and S&P 500 Total return (100, June 30, 2012) 1000 878 900 800 700 600 500 400 313 300 200 281 100 0 06-12 04-13 02-14 12-14 10-15 08-16 06-17 04-18 02-19 12-19 10-20 GAFAM equal weighted S&P 500 GAFAM relative performance Source: Datastream, Amundi Research, data as of 13 November 2020 Document for the exclusive attention of professional clients, investment services providers and any other professional of the financial industry - 9 40% 35% 30% 25% 20% 15% 10% 5% 0% 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 Apple + Microsoft Other IT sector stricto censu Google, Facebook & Amazon Source: Datastream, Amundi Research, data as of 13 November 2020 35 80% 30 60% 25 40% 20 20% 15 10 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 Prime moyenne vs S&P (Ech D) Prime mensuelle vs S&P (Ech D) Microsoft, Google, Apple & Facebook équipondérés S&P 500 Source : Datastream, Recherche Amundi, données au 16 novembre 2020 30 50% 25 36% 40% 31% 20 30% 24% 22% 18% 17% 15 15% 20% 15% 13% 10 4% 10% 5 0% 0 -4% -10% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Premium GAFAM-Amazon (R SC) GAFAM-Amazon (Equal Weight) S&P 500 Source: Factset, Amundi Research, data as of 13 November 2020 , 350 25% 300 23% 250 21% 200 19% 150 17% 100 15% 50 13% 0 11% 2007 2009 2011 2013 2015 2017 2019 Apple + Microsoft Other IT sector stricto censu Google, Facebook & Amazon IT at large in % of S&P (R Sc) Source: Factset, Amundi Research, data as of 31 December 2019 1000 878 900 800 700 600 500 400 313 300 200 281 100 0 06-12 04-13 02-14 12-14 10-15 08-16 06-17 04-18 02-19 12-19 10-20 CROSS ASSET # 12 1000 878 GAFAM equal weighted INVESTMENTS&P 500 STRATEGYGAFAM relative performance 900 Source:800 Datastream, Amundi Research, data as of 13 November 2020 700 600 2/ US IT sector stricto censu and at large in % of S&P weighting THIS MONTH’S TOPIC 500 400 313 40% 300 35% 200 281 30% 100 0 25% 06-12 04-13 02-14 12-14 10-15 08-16 06-17 04-18 02-19 12-19 10-20 20% 15% GAFAM equal weighted S&P 500 GAFAM relative performance 10%Source: Datastream, Amundi Research, data as of 13 November 2020 5% 0% 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 40% Apple + Microsoft Other IT sector stricto censu Google, Facebook & Amazon 35%Source: Datastream, Amundi Research, data as of 13 November 2020 Big Tech’s real issue 30% and Microsoft has seen its weighting After these reminders about valuation, let’s is not so much 25% halved, from 30% to 15%. This is why it is move on to earnings. Graph 4 shows that its valuation as the 20%important to be wary of generalisations the net earnings of the Tech sector in the 35 80% sustainability of its 15%when reference is made to a new valuation broadest sense increased from USD 89 10%bubble. While certain Tech or related billion to USD 299 billion between 2007 30 profits stocks,5% members of the S&P 500 or the and 2019, i.e. an average rate of increase60% Nasdaq, such as Netflix, Uber or Tesla may of +10.7% per year compared to +2.5% seem0%25 expensive, this is not the case for all for the other S&P stocks. Consequently, 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 stocks. Moreover, while GAFAM companies over the same period the share of profits40% enjoy20 recordApple + Microsoftvaluations, thisOther does IT sector not stricto censuof the Tech sectorGoogle, Facebookin the &broadest Amazon sense necessarilySource: Datastream, mean Amundi they Research, are expensive data as of 13 .November With 2020increased from 11% to 24% of the S&P 500. 20% the15 exception perhaps of Amazon, the issue GAFAM companies did even better since is not so much their valuation multiples as their profits grew on average by +16.9% the sustainability of their profits; a little like per year vs. +6.4% for the other IT stocks. the10 banks on the eve of the Great Financial Finally, within GAFAM companies, 0%first 2012 2013 2014 2015 2016 2017 2018 2019 2020 Crisis35 in 2008 but for other reasons. place goes to Facebook (+51.4% per 80%year Prime moyenne vs S&P (Ech D) but fromPrime mensuelle2011 to vs 2019), S&P (Ech ahead D) of Amazon Apart fromMicrosoft, Amazon, Google, Apple the & valuationFacebook équipondérés of the S&P 500 other30 GAFAM companies seems relatively (+30.5% per year), Apple (+24.7%), Google 60% “normal”.Source : Datastream, Accordingly, Recherche Amundi, on donnéesthe basis au 16 novembreof (+19.1%)2020 and Microsoft (+8.3%). Given their 12M25 Forward PE ratios, their premium to earnings power, the unparalleled market capitalisation of GAFAM companies (in the S&P 500 (38%) remains close to its 40% terms of absolute amount rather than in average20 for the last eight years (33%). Moreover,30 this type of ratio does not take ratios) appears more comprehensible.50% However, the issue of the sustainability20% account15 of the abundant cash of these companies.25 For36% this, it is necessary to of these profits is more acute than ever.40% resort to the Enterprise Value (EV=Market Unlike at 31%the end of the 1990s, the US 10 0% 20 Tech sector now generates24% enormous30% capitalisation2012 2013 – Net debt). 2014 And 2015effectively, 2016 2017 2018 201922% 2020 EV/EBIT reveals an even more moderate18% profits. During the17% Great Financial Crisis in 15 Prime moyenne vs S&P (Ech D)15% Prime mensuelle vs S&P (Ech D) 20% 15% 13% 2008 and even more so during the COVID premiumMicrosoft, (see Google,graph Apple 3) &with Facebook 17% équipondérés in 2020 S&P 500 crisis, it has demonstrated the robustness and10 24% in 2021 vs. 38% for the 12M 10% SourceForward : Datastream, PE ratio.