Investors seeking long-term returns from international equities need to look beyond the current crop of market heavyweights. Move over FAANG, a new group of disruptors will lead the S&P 500 a decade from now.
The Facebook, Apple, Amazon, Netflix and Alphabet’s Google stocks, otherwise known as FAANG have lead S&P 500 index for the last decade but the top stocks in 2029 will likely hold a completely different set of companies.
The new leading stocks are going to be disrupters such as driverless cars, space exploration and long-term winners like pharmaceuticals and energy.
Fidelity International portfolio manager, Amit Lodha says: “We think Apple will be out. My view is that the FAANG stocks we know today will be broken up into two or three companies,” he says.
Looking at the next decade, it is unlikely that the same companies will have the same level of growth and returns as they have had.
Lodha says anyone who doubts this should look at the companies that dominated the S&P 500 in the 2000s. The market leaders have changed dramatically over the last 10 years with Exxon Mobil, Walmart, Procter and Gamble, Microsoft, AT&T, General Electric, Johnson & Johnson, Chevron, Pfizer and JP Morgan Chase being the largest companies in the S&P 500 by market cap in 2008.
“If you look at the decade of the 2000s, it was the decade of China. The 2010s have been all about technology,” Lodha says.
The following 10 years marked a significant increase in technology with the market leaders of Microsoft, Apple, Alphabet, Amazon, Berkshire Hathaway, Facebook, Johnson & Johnson, JP Morgan Chase and Visa.
“I expect Amazon, Alphabet and maybe Microsoft to split their businesses within the next three to five years, either driven by increased regulatory scrutiny or by management attempting to reduce complexity,” he says.
From the large cap companies today, he forecasts pharmaceutical company Illumina to be a large player but could potentially be acquired by a pharmaceutical major like Merck. An energy company like Exxon Mobil or Saudi Aramco if they are listed in the US are likely candidates.
“With the rapidly growing old-age population, healthcare representation in the top ten is sure-fire for any company that addresses any of the various unmet needs of cures for Alzheimer’s, cancer; or diabetes, Lodha says.
Financial services are projected to still be in the top ten with Visa and Mastercard tipped to be on the list reflecting the consumer shift from cash to cards.
Additionally, there is enormous potential of tech start-ups to end up in the top 10 of S&P 500 with Alphabet’s self-driving car subsidiary, Waymo and space exploration company Space X.
“Good capital allocation is the single most important driver of future performance and this is what makes Warren Buffett, and by extension Berkshire Hathaway, unique. My second forecast of this note (the exit of Berkshire Hathaway from this list by 2029) is one which I would gladly celebrate being wrong.”
In the short-term, global asset management group Janus Henderson has moved away from FAANG and into ‘cheap’ stocks such as Cisco, Hammerson, Enel, AXA and Pfizer which have a higher dividend yield and free cash flow yield than FAANGs.
According to Jane Shoemake, Janus Henderson investment director on the global equity income team, not all disruption is profitable and investors should be looking to avoid sectors that are open to disruption.
Fidelity International’s Lodha says: “With the pace of disruption and change only rising, an ability to adapt and change to the ever-evolving market environment through consistent innovation remains the key bulwark to shaping what will be the driving factors of the top ten in the decade ahead.”
Some of the current holdings in Fidelity’s Global Equities Fund are Recruit Holdings, Kotak Mahindra Bank, Ocado, Ericsson and AstraZeneca.