Labels, Anagrams and Acronyms
This blog is not about the countdown to the US Presidential election or to the end of Brexit negotiations. I’m sure your inbox is full of commentary on both.
For those who continue to work from home and who have been tempted to enjoy a mid-afternoon tea break watching Countdown (not me by the way), you will be familiar with the daily search for words from a randomly selected group of vowels and consonants plus the occasional anagram. Pretty much the same world as those who search for snappy acronyms for the big tech stocks in the US. What started out as FAANGs has become more difficult since Microsoft has entered the mix and Google is now Alphabet. Tesla has also entered the mix after its exponential growth. So, Countdown fans, see what you can make of: FAAAMT
The above letters represent the initials of six of the top seven stocks by market capitalisation, representing over 23% of the MSCI US Equity Index, the odd one out being Johnson & Johnson (Healthcare).
By the way, Amazon is categorised as a consumer discretionary stock but most view it as a ‘tech’ stock.
A weaker US dollar has usually been supportive for emerging market assets. Consequently, we have received some questions about our exposure to ‘EM’ equities and whether it is increasing. As thematic investors, we eschew the geographic restrictions of country, regional or other boundaries based on fuzzy logic in favour of key long-term drivers of returns, such as, the digital economy, sustainability, living longer and infrastructure (not necessarily the visible kind). Any exposure to economies classified as ‘emerging’ is a by-product of that approach.
One theme might be exposure to rising Asian consumer wealth which might involve the Chinese consumer. That does not necessarily translate into Chinese companies but could include exposure to companies that derive the majority of their revenues from Asian consumers.
Many of the ‘EM’ equity investors reference the MSCI Emerging Market Equity Index which is another case of labelling that could be deemed to be inappropriate. Here’s why.
The MSCI Emerging Market Equity Index has 75% of its weighting in four Asian countries. Take out the 8% in India and you are left with 67% in China, Taiwan and South Korea with China over 42% of the index. So, two-thirds of the ‘EM’ index is North Asia and heavily dominated by China.
Looking at the individual company components also gives some interesting perspective. Four companies represent over 23% of the ‘EM’ index. Alibaba, Tencent, Taiwan Semiconductor (TSMC) and Samsung. Quite a ‘tech’ influence although Alibaba, like Amazon, is categorized as a consumer discretionary company. Some similarities with the US’s dominance of world equity indices and ‘tech’ companies within the US element.
But is Samsung, for example, an ‘EM’ stock? It is because it is based in South Korea, which MSCI classifies as an ‘EM’ country. Look at many large-cap global equity funds from the big asset gathering companies and you’ll see Samsung in many of them, possibly TSMC too. Allocating assets by label is open to contamination and confusion. We’re not saying Samsung is a bad company but own it because you love it, not because it is a significant part of an index or where it comes from.
To finish, let me pose those Countdown viewers amongst you with an easier challenge than the one posed at the beginning of this blog. The four biggest ‘EM’ stocks by market capitalisation have the following initials, ATTS. Make a word or snappy acronym from those.
Perhaps ‘STATs’ is underused (other combinations are available)?