TAM Bites: Equity Risk Premium, Sustainability Hub, and the Magnificent 7

The “Equity Risk Premium” is a term many read about but often skim over. It’s essentially the additional return an investor expects to receive from investing into higher risk stocks rather than bonds, which are usually lower risk. Investing in shares has carried a positive risk premium over bonds going back to 2008, which has more than compensated investors willing to take that greater risk if it means greater rewards. However, after the torrid 2022 and the average 2023, the bond market is looking like a high-quality, low-cost, income yielding investment to challenge the crown of investing in stocks. This comes at a time when the equity markets, particularly in the US, keep breaking all-time highs, which is stretching how attractive that risk premium really is, i.e., stocks have gotten expensive to own, and bonds are cheap to own vs their quality. This should begin to challenge the age-old attractiveness of choosing equities for your investment returns. One must look back nearly 20 years to find a time when the scales were tilted towards bonds like this!

It has become clear to us that many approaches to sustainability cannot be quantified in a simple, holistic manner the way that performance and risk can. Although these approaches have definite merit, there are so many ways an investment can positively impact the environment and society, which cannot be accounted for in a company’s current carbon footprint or headline policies. Last year we saw the temperature levels touch the 1.5 degree warming threshold that the Paris agreement was created to avoid, all the while learning of pressing societal issues such as a burgeoning obesity epidemic and mental health crisis. We believe that those who have made the conscious decision to invest with these matters in mind should have greater transparency on the positive effect they are having. This is why we have launched our Sustainability Hub, which includes the brand new Sustainable Snapshot blog designed to bring our valued investors along on this journey as we endeavour to invest for positive environmental and social outcomes through our funds, and drive better standards through engagement.

The “Magnificent 7” stocks are firmly in the driver seat, carrying US equity markets even higher. And the latest earnings season was an opportunity for these tech juggernauts to justify the AI enthusiasm already baked in their share price by showcasing profitability, which some did. Meta and Amazon delivered quarterly earnings that far exceeded Wall Street’s expectations, whilst Microsoft posted their strongest revenue growth since 2022. However, some dispersion emerged as plunging EV demand weighed in on Tesla’s earnings. And despite returning to revenue growth, rising competitive pressures in China squeezed demand for Apple products. AI’s posterchild, Nvidia, is also to report this month, and are forecast to show continued growth with the stock already extending their rally, up 40% this year. However, the “Mag 7’s” eye watering allure still has many questioning their lofty valuations with comparisons been drawn to the early 2000’s dot-com bubble. And whilst current valuations trade at a fraction compared to previous high-flyers, we also see value in a “pick-and-shovels” approach, i.e. investing in companies further down the AI supply chain that help produce the underlying technology. Therefore, as we progress through 2024, we too aim to tap into those opportunities and avoid chasing yesterday's winners.

If you would like to speak with us about these TAM Bites, or to discuss our discretionary investment management services in general, please get in touch with David today.