Last year’s oil crash signals the world’s reliance on fossil fuels is ending and that means bad news for the UK stock market, according to Scottish Mortgage Trust (SMT) manager James Anderson.
The 42% slide in crude prices in the fourth quarter of 2018 is often explained as the result of a slowing global economy and the difficulty of nations in the Opec cartel to curb production, but Anderson said that it clearly showed that the world had changed.
‘What that tells you is the carbon era is over,’ Anderson declared, pointing to the continual decline in the cost of batteries to store renewable energy and the low cost of solar power.
This had profound implications for the FTSE All-Share, which in capital terms had ‘gone nowhere’ this century, he said. Stock market data confirms the index closed 1999 at 6,930 and currently stands at 6,929, although on a total return basis – with company dividends included – it has done much better, nearly doubling with growth of 95%, according to online broker AJ Bell.
Anderson, a growth investor who prefers companies like Amazon (AMZN.O), the trust’s biggest holding, to re-invest profits in their businesses rather than pay dividends to shareholders, said: ‘It [the All-Share] will go nowhere until we have companies of extraordinary value,’ he warned.
‘Normal companies are not valuable,’ he added, referring to earlier research conducted for his employer, Baillie Gifford, that demonstrated how only a handful of companies generated the bulk of long-term stock market returns.
Unfortunately for UK investors, Anderson said their home market was stuffed with oil companies, power providers and car suppliers exposed to the fossil fuel economy, as well as traditional drugs companies that co-manager Tom Slater pointed out were challenged by the rise of genetic treatments.
Anderson, who has previously warned that 69 of the world's 100 biggest companies were 'doomed' long term, said: ‘Just about everything that is quoted in the British stock market is over. The opportunity set lies elsewhere,’ claimed Anderson, who with Slater, has just 3% of Scottish Mortgage assets invested in the UK.
Watch our video interview with James Anderson from last year.
Under their stewardship, the £7 billion global investment trust – the only one listed in the FTSE 100 of top UK companies – has focused most of its investments in technology disrupters based in the West Coast of the US and the East Coast of China.
The managers run a concentrated portfolio, investing 51% of the trust’s assets in its top 10 companies. In addition to a 9.7% weighting in Amazon, the pair are big backers of Illumina (ILMN.O), the leading manufacturer of low-cost gene sequencing machines that accounts for 8.7%, and hold 6.8% in Tesla (TSLA.O), the pioneering but controversial electric car-maker that they believe is streets ahead of auto manufacturers.
Where Bezos is looking
Underlining their theme of long-term investing, Slater recalled a meeting with Amazon boss Jeff Bezos last autumn. The e-commerce entrepreneur, who last year became the world’s richest person with a net worth of $112 billion, told Slater he spends most of his time living in the future and said that 'it is a wonderful place'.
‘He only comes back to immediate operational realities if something has gone wrong,’ Slater added.
Slater identified five points of Bezos’ interest: the Alexa digital assistant and extending voice recognition technology; media, where Amazon is vying with Netflix (NFLX.O) – another trust holding – as a commissioner of new programmes; grocery, after its $13.7 billion acquisition of Whole Foods last year; cloud computing, in which Amazon Web Services is a leading player; and healthcare, where a joint venture with Warren Buffett’s Berkshire Hathaway and investment bank JP Morgan Chase also signalled his intent to break into another unreformed sector.
Although Scottish Mortgage can be volatile and was buffeted during sell-offs of technology stocks last year, its shares proved comparatively resilient in 2018, rising 4%, while the All-Share index dropped 9.5% and global markets – as measured by the MSCI World ex-UK – slipped 3% in sterling terms.
Longer term, the trust has one of the best records of any global investment trust, generating a 673% total return for shareholders over 10 years, trouncing the All-Share index which returned 144%.