Boris Johnson’s recent announcement to keep the current coronavirus restrictions in place in England for another four weeks signalled that the UK is not yet out of the woods.
Despite this, the vaccination programme in the UK has been going well, and Public Health England has reported positive data on vaccine effectiveness.
Meanwhile a number of stock market indices are now well above their pre-pandemic levels. The FTSE All-World Index reached a fresh all-time high in mid-June.
There are many reasons to feel hopeful about the stock market in 2021, including:
While no one can accurately predict the future, all we can do is evaluate which factors will influence the stock market and invest wisely. One way to do this could be by investing in mega cap, high quality stocks with industry leading positions across multiple attractive sectors that over time, that can deliver sustainable above average returns through the strength of their market position in an attractive industry.
What are mega cap companies?
“Mega cap companies” are generally thought of as those whose total value of all shares in issue is above $100 billion. Most mega cap companies share some desirable characteristics. To become gigantic companies generally need to have had something special. Whether or not this something special will continue, is key to determining which mega cap firms may make good long-term investments.
What are the shared desirable characteristics of mega cap companies?
Diversification. Gigantic companies are generally much more diversified than smaller companies. Their businesses typically span geographic regions and have multiple products. At some stage all businesses experience some disruption. Being well diversified means that difficulties in any region, or with particular products, do not cause critical damage to an organisation.
Predictability. This diversification helps to make the profits from mega cap companies more predictable. Much modern finance theory encourages big institutional investors to value such certainty more highly.
Economies of scale. Mega cap companies typically have substantial economies of scale. From a financing perspective, rating agencies typically provide higher ratings for mega cap companies enabling them to borrow for less. Size also confers operational advantages. Payment network operators Visa and Mastercard, for instance, are much bigger and more efficient than peers. This enables some mega cap companies to be able to provide lower cost solutions than others.
People. Mega cap companies have the ability to attract and retain talent from smaller organisations, or simply to acquire them.
Liquidity. Shares in mega cap companies are typically highly liquid. People and institutions regularly trade in these stocks. This results in lower transaction costs as the spread between bid and ask price is low, and enables positions to be bought or sold more easily than smaller companies. In “risk-off” environments the relatively lower liquidity in smaller capitalisation stocks can mean that share prices fall more dramatically than they do for larger companies when there are more natural buyers of shares.
We can’t time the market however we think that there are exciting opportunities to invest in global companies over a long term time horizon.
For more information on the Ashburton Global Leaders Equity Fund* and Portfolio* that invests in mega cap stocks and aims to deliver sleep at night security visit: www.ashburtoninvestments.com/global-leaders-equity
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