Spice Up The Portfolio With A Twist Of Mega Caps And Secular Megatrends

International | Jul 07 2021

US equities offer easier access to mega caps and secular megatrends that have boosted investment returns over the decade past. Shareplicity's Danielle Ecuyer argues it's still not too late to hop on board.

-Why investing in US stocks should be an integral part of any investment portfolio
-US offers easier access to secular megatrends that are changing the world and our investing landscape
-15% of US stock market investors only started in 2020

By Danielle Ecuyer

If you happen to be sitting pondering your share investments during yet another stay-at-home lockdown, then what better time to contemplate adding some diversification to your investment portfolio.

I am sure you have been told many times over by experts ‘diversify, diversify, diversify’ and now more than ever the investing universe of stocks is as plentiful and as accessible as any time in history.

If you had said to me 18 months ago the world was going to be thrown into the worst pandemic in an over one hundred years and, by the way, stock markets would be trading at all-time highs, I am pretty sure I would have scoffed and said, ‘don’t be so silly’.

The trillion-dollar mega caps keep on keeping on!

And yet here we are: the S&P500 and Nasdaq have reached all time highs and Facebook has just entered the exclusive, yet expanding one-trillion-US-dollar market capitalisation club, snuggling up to Apple (US$2.25 trillion), Microsoft (US$2 trillion), Amazon (US$1.74 trillion), and Google’s parent Alphabet (US$1.67trillion). Will the controversial Tesla be the next mega cap stock to march through the magic trillion-dollar mark?

To place these numbers into context, Australia’s GDP reached US$1.4 trillion or AUD$1.81 trillion in the first quarter of 2021. I know small is beautiful and small has its day in the sun, meaning the Australian share market is no slouch when it comes to offering good investment returns. But let’s face it, why wouldn’t you want a slice of the biggest investing pie in the world when there are not only so many great stocks to choose from and the liquidity is so plentiful? Remember you don’t have to sell everything in Australia, rather spread the love to the US stock markets.

We all know the big names of the US stock stalwarts such as McDonald’s, Disney, Walmart, JP Morgan, ExxonMobil and Ford, and while these stocks have been good performers as part of the US reflation and re-opening of trade, the US stock markets remain dominated by global technology and the innovation giants. I am of course referring to the mighty FAANMG stocks (the trillion-dollar mega caps Facebook, Apple, Amazon, Microsoft, Google) and Netflix.

But it doesn’t take long for even new investors to the US stock markets to realise there are dozens of investible stocks that are characterised as being small-to-midcap stocks in the USA, but which dwarf even the Australian majors like Commonwealth Bank. Zoom for example at one point reached a market cap of US$176 billion at a 52-week high of US$588 per share, which is the same as where Commonwealth Bank is at A$100 per share. There is no straight-out comparison between Australia’s largest bank and one of the world’s most successful video conferencing companies, except that software-as-a-service (SaaS) businesses, such as Zoom, which didn’t exist 20 years ago are now changing the way we behave and interact daily.

Square, known for the white square payment system that you connect to your smart phone and allows instantaneous transactions for small businesses and is expanding its lending and services within the SME sector, has a market capitalisation of US$117 billion and the payments giant PayPal with its global presence is currently around a US$330 billion market cap.

My journey into US stock investing started in 2016 after I had sold a lot of Australian ‘blue chips’ in mid-2015. The search for growth and technology stocks has been inspiring and sometimes challenging when the macro-economic narratives cause earthquake like reversals out of one thematic or sector and into another, such as from the often discussed ‘growth-technology’ to ‘value-cyclical’ trade.

A pandemic and technology changed the world of investing

The impacts of the pandemic have been wide reaching and the effects have also changed the investing paradigm.

"We’ve seen tremendous growth and engagement among individual investors over the past year as a result of lower trading costs, new products and services aimed at greater ease and accessibility, and the investing opportunities presented by market volatility."

[Jonathan Craig, Charles Schwab senior executive vice president and head of Investor Services]

The lockdown and stay-at-home economies have spurred on the rise of a new breed on investors as coined by Charles Schwab in The rise of the Investor Generation 2021 report.

The Charles Schwab’s survey revealed that “15% of US stock market investors got their start in 2020”. According to the study the Gen I (Generation Investor) is younger, with a median age of 35 years, compared to 48 years pre-2020. The split is 16% Gen Z; 51% Millennials; 22% Gen Z and 11% Boomers.

The investing traits have also altered with over 80% surveyed wanting better access to expert information, the tools to conduct their own research and they want to be more actively involved in managing their portfolios and not the ‘set and forget style’. They want to invest to build wealth for the long term – this is hardly a novel concept when you look at the investing guru billionaires at Berkshire Hathaway, Warren Buffett and Charlie Munger who have been crafting their trade for over half a century.

Performance speaks volumes

As the S&P500 and Nasdaq indices reach all-time highs, up 37.9% (YoY) and 44.19% (YoY), respectively, I am sure some investors will be hesitant to step into the US stock markets, but the ASX200 is also at all-time highs, registering a 24% rise over the 12-months to June 30, 2021.

In terms of the last five years, one look at the following chart (source Bloomberg) shows how investing in US stocks, notably on the NASDAQ (the tech giants), has been a wealth creator for shareholders. Nasdaq as depicted by the orange line has outperformed both the S&P500 and the ASX200. Is it any wonder that millionaires have been minted in the last five years via the technology trade?

Investing in US stocks should be an integral part of any investment portfolio. The multiple options available via different trading platforms, apps and financial products, mean you can be as hands on or off as suits your investing needs and style.

If you have the investing bug and love to research stocks, then direct investing in US stock will most likely be your thing.

If direct stock-picking is a bridge too far, there is a plethora of US listed ETF products to mix and match your investing style or ESG approach. If you want a more proactive, actively managed ETF style, then there are the stable of innovation funds such as Cathie Wood’s ARKInvest or the more quality, technology slanted GK (ticker code) ETF from Ross Gerber’s Gerber Kawasaki, that invests in nine themes for the future.

You don’t even have to leave your leaving room, metaphorically speaking, with a wide range of ETFs listed in Australia that allow you to reap the rewards of some of the secular megatrends that are changing not only the world but our investing landscape and returns.

In a world where interest rates will remain lower than historical averages and more people are looking to make the most from their savings, then opening the investing world to the biggest stock markets with companies that continue to grow their earnings make sense.

I was lucky enough to start my journey six years ago, some would argue too late, but it is never too late to expand your investing to the largest markets with multiple opportunities. With the world at the end of the tips of your fingers, what’s stopping you?

Danielle Ecuyer has been involved in share investing in Australia and Internationally for over three decades, both professionally and personally. Since the success of her first book, Shareplicity, Danielle has been a sought-after market commentator. Shareplicity 2 A guide to investing in US stock markets (Major Street Publishing $34.95) is now available at Booktopia, Amazon and all good bookstores. Free first chapter download at www.shareplicity.com.au

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