The formerly high-flying FAANG stocks appear to be losing their bite. Once a key driving force behind the US stock market’s recent highs, over the past year growth in this acronym of tech giants - Facebook, Apple, Amazon, Netflix and Google - has lagged their more defensive counterparts.
To add to their woes, this week the Organisation for Economic Co-operation and Development (OECD) proposed sweeping changes that will allow governments more power to tax multinationals doing business in their countries.
This year more than 130 countries and territories agreed that an overhaul of tax rules, largely going back to the 1920s, was long overdue. The Paris-based OECD was tasked to come up with the proposals which will be discussed next week when finance ministers from the Group of 20 economic powers meet in Washington.
The plans won’t just be limited to the tech giants of course, they would be aimed at all multinationals, so luxury goods makers and global car companies, for example, would equally be liable.
The winners would be large countries like the US, China, UK, France and Germany, who would have the right to increase tax on corporate income earned in their territories, while the companies themselves, tax havens and low-tax countries such as Ireland would lose out.
This would enable France, for example to tax an element of the sales of Google to French advertisers, while the US could have greater rights to tax French luxury brand company LVMH on sales generated in America.
This couldn’t come at a worse time for the FAANGs as the US bull-run, currently the longest in its history starts maturing.
Stocks in the NYSE Fang-plus index, which also includes Alibaba, Nvidia, Tesla, Baidu and Twitter have trailed behind the broader market by nearly 10% over the past 12 months.
The reversal in fortunes reflects a shift in investment sentiment towards more defensive corners of the market, areas like consumer staples and utilities which can be expected to do well even if the global economy weakens.
The worry is that the performance of the FAANGs might be a warning of what might happen to the broader market. The recent slowdown in the FAANGs is mirrored by the failure or disappointing performance of several recent flotations. The failure to attract buyers for We Work and the slide in recent floats like Lyft and Uber shows how investors are less inclined to give high growth but loss-making businesses the benefit of the doubt.
You could say the recent wobble in markets has more in common with the top of the dot.com bubble in 2000 than it does with the credit crunch of 2008. It differs from that earlier period in the sense that there is no euphoria about the stock market generally, but it does raise red flags about a stock market bull-run that had of late become very narrowly-focused.
The key take-away for investors here is to make sure your portfolio is also not too narrowly-focused. Over time it’s quite easy to build up a home bias with the shares and funds you hold, perhaps with an unintentional focus towards larger companies in the UK.
It’s also worth looking under the bonnet of any defined benefit pensions you may hold to see where they are invested, or if you’re part of a share scheme at work, consider if your overall investments are unequally weighted towards a particular company, sector or region.
Being diversified is one of the best ways to ensure your investments are prepared for whatever lies ahead in the future.
This coming Tuesday, 15 October at midday, Tom Stevenson will be sharing his latest Investment Outlook which will be launched with a live online question and answer session. As well as all the usual updates on the main asset classes and geographical regions, Tom will be looking at the threat of recession, the chance of inflation returning and the ongoing influence of politics on both sides of the Atlantic. If you can’t join us live, a recording of the webcast will be available to watch later.
Important information: The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.
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