FAAMG: The Market Leaders of COVID-19 Pandemic

FAAMG is an abbreviation coined by Goldman Sachs for five top-performing tech stocks in the market, namely, Facebook, Amazon, Apple, Microsoft, and Alphabet’s Google. In 2017, FAAMG only make up 13% of the S&P500 but thanks to the COVID-19 pandemic which has adversely impacted most of the rest of the companies in S&P500, FAAMG has rallied strongly as the new stay at home economy has resulted in a global boom in tech services. Fast forward to 2020, FAAMG stocks now account for 37% of the returns of the S&P 500 index, which tracks the market capitalization of 500 large companies across various industries trading on the NYSE and NASDAQ.

Over at NASDAQ where it is dominated mainly by technological stocks and comprises of 3,000 companies, FAAMG accounted for 55% of the NASDAQ’s peformance.

Is There a FAAMG Bubble?

FAAMG has been likened to the tech stocks that were prevalent in the market before the 2000 tech bubble burst. Historically, growth stocks have higher volatility than the market due to their risky ventures. However, FAAMG stocks have a valuation with unusually low volatility, which is reminiscent of the pre-dotcom crash tech stocks. While analysts, notably from Goldman Sachs and UBS, have expressed doubt in the continued low volatility of the tech giants, they agree that these tech stocks in the digital era still have plenty room to grow as they delve into new technological ventures in machine learning, big data, cloud computing, social media, video streaming, artificial intelligence (AI), blockchain and e-commerce systems.

However, buying what's popular after it becomes popular produces low or no returns. With stay-at-home dynamics gradually fading away, it's perhaps interesting to look for less-popular opportunities in other sectors which might gain attention soon. 

 
Meanwhile, in the stock asset class, only tech stocks are attractive in the short term as non-tech stocks are suffering much more from the pandemic. During normal times, investors run into "older" value stocks for their stable dividends and free cash flows. However, these "older" stocks are currently facing the worst quarters they ever witnessed due to the stay-at-home environment. For example, Exxon Mobil (XOM) revenue fell by 52.8%, Boeing (BA) revenue by 25%, General Electric (GE) revenue by 38.4%, Ford (F) revenue by 53.5%. Dividends cuts and suspensions are currently the highest since '09 and could potentially surpass that level soon.

Although the FAAMG stocks valuation is on the high side, there are few short term alternatives given that the pandemic economic will be around for at least another 6 months or so. Getting out of FAAMG stock in totality at this moment in time if base solely on its expensive valuation, may not be the best strategy. Careful calibration in balancing between new and old industries is needed to maneuver out of this once a life-time global pandemic.  

Portfolio Strategy

The portfolio has performed well for the month of July with the portfolio performing between 2.94% - 5.30% with CPF-OA out performing due to the tech heavy nature of Franklin US Opportunity Fund. Energy fund continues to underperform, though I will be holding on to it due to the upside potential, with a reduced weightage. Energy fund is expected to recover swiftly once societies start to transit from working from home as lock-downs are eased and travel starts to flow more freely. As the valuation of the FAAMG stock become more and more unsustainable over the months, it may be become more prudent to take some profit down and par down our aggressive portfolio as the S&P500 is near to the point before the pandemic, without an accompanying recovery in the real economy. The problem now lies that a brewing cold war between China and US will continue to intensify as Chinese and US companies will continue to take blows as politics will drive these companies out of their respective markets as seen by the recent announced ban of Tik Tok and WeChat from the US and moving funds out of the tech heavy US stock to an Asian fund which is also increasingly dominated by Chinese tech stocks will also pose a risk to our portfolio. On the bond sector, the zero interest rate environment also caps the return of bonds both in terms of capital appreciation and interest, making it a sector we will move in, only at the last resort when no other areas can have better value or returns.

Hence, it does not make sense to run for shelter of bonds or a rapid retreat from US equities due to the possibility of a correction in FAAMG stocks, as the alternatives in the short term are not as attractive. Therefore, it make make some sense to take some profit, while making some tuning to the portfolio to balance out both the short and long term risk and return, in order to navigate the financial markets in the era of COVID-19.