24.03 Liontrust Global Innovation Report - The Rise of AI 04.24 - Flipbook - Page 13
We often encounter the argument that technology companies owe
much of their success over the past decade or so to low interest
rates and that higher interest rates over the coming years will
hamper them.
It is extremely difficult to predict the path of interest rates over the
coming years – and we do not take a strong view on it – but we
firmly believe that even if higher rates are sustained, they will not
affect the progress of good technology companies or our ability to
achieve excellent returns investing in them.
Technology companies won on the fundamentals
in the 2010s
Technology stocks performed strongly in the 2010s because they delivered on the fundamentals. Over the course of the decade, technology
stocks as represented by the Nasdaq 100 index returned about 18% per year – ahead of the still strong S&P 500 annualised return of
13.5%, the MSCI World return of 10% and the FTSE All Share return of 8%.
18%
13.5%
10%
8%
Nasdaq 100 index
S&P 500
MSCI World
FTSE All Share
How much of that 18% per year was driven by technology
companies’ fundamentals and how much by multiple expansion?
The answer may come as a surprise. A huge 15.5% of the 18%
(an 86% share) was due to fundamentals: 14.2% of earnings per
share growth per year and an average annual dividend yield of
1.3%. Only 2.5% per year was due to expansion of the priceearnings multiple. Huge fundamental successes over the decade
such as Apple (25% average annual EPS growth) and Google
(17% average annual EPS growth) trip off the tongue but there
were many more in the ranks.
Best returns
2010’s decade annualised stock returns
Breakdown – 2010’s decade annualised stock returns
20%
20%
18%
18.0%
18%
16%
16%
14%
14%
12%
8.1%
8%
2.5%
Dividend yield
1.3%
EPS growth
15.5% (86%
share) from
fundamentals
12%
10.1%
10%
P/E multiple expansion
10%
8%
6%
6%
4%
4%
2%
14.2%
2.8%
0%
Nasdaq
MSCI World
FTSE All Share
Source: Bloomberg, data as at 19.10.23.
1.9%
3.4%
5.1%
2%
0%
2.2%
Nasdaq
MSCI World
2.8%
FTSE All Share
Source: Bloomberg, data as at 19.10.23.
Tech’s outperformance driven by fundamentals
Further, the contribution from multiple expansion was arguably
justified, with technology companies coming off the back of a
decade in which they were deeply disliked by investors following
the tech bubble and subsequent bust around the turn of the century.
The 2.5% expansion of the price earnings multiple was also not
much more than the 2.2% average annual multiple expansion of
the MSCI World index and 1.9% of the FTSE All Share. Today,
the Nasdaq 100 sits, as it did at the end of the last decade on
the eve of Covid, at a 30% premium to the S&P 500, having
fallen as low as 0% in 2012. We believe this is reasonable given
technology companies’ significantly higher structural growth and
lower leverage than the rest of the market.
Past performance does not predict future returns.
The rise of AI: Technology and Innovation Report - 13
