The writer is chair of Rockefeller International
Given the battering markets have dealt so far this year to tech stocks, led by the Faangs, it is worth stepping back and recognising what is coming apart: the whole concept of acronym investing.
The unbundling of the Faangs is much like the fall of the big emerging markets, known as the Brics, a decade ago. A hot theme seizes the imagination of investors. Marketers coin an acronym to capture the trend and it works well for a while. Emboldened, people start piling on, deriving similar acronyms. As the trend matures, its fundamentals deteriorate. Many names start to show serious flaws but, instead of rethinking, investors keep rewriting the acronym. In the end, few if any of the original prospects are left with a mass following.
Coined in 2001, the Brics originally included Brazil, Russia, India and China. Marketers later added South Africa. Following an unprecedented, decade-long boom in emerging markets, Wall Street analysts started pitching smaller countries as the same bet on the rise of emerging markets. They coined Civets (Colombia, Indonesia, Vietnam, Egypt, Turkey and South Africa) and Mist (Mexico, Indonesia, South Korea and Turkey).
Soon the easy money that had been flowing into these markets started to dry up, exposing their frailties. When India faltered in 2011, sales folks suggested Indonesia replace India as the “i” in Brics. Then commodity prices fell sharply, taking down Brazil, Russia and South Africa, and investors wised up. One dismissed Brics as a “bloody ridiculous investment concept”. At varying speeds, the smaller emerging markets tanked in the 2010s, and country-based acronyms went out of style.
A similar investment cycle is playing out now. Coined in 2013 as Fang (Facebook, Amazon, Netflix, Google), marketers soon added Apple to make it Faang. These stocks had an amazing run and analysts began stretching the formulations to Fangmat (including Microsoft and Tesla) or Fangmant (with Nvidia). They extended the concept to China, packaging its Big Tech firms as Bat (Baidu, Tencent and Alibaba).
Over the past few months, the churn that once hit emerging markets has hit Big Tech. Bat stocks cratered first, as Chinese regulators cracked down on the tech sector. In the US, as monetary conditions tightened, investors came to the typical late cycle realisation that tech companies were spending way too much money to justify their growing valuations.
They started dropping names. Netflix was the first to go, leaving behind Maant (Microsoft, Apple, Alphabet, Nvidia, Tesla). By last week, Apple was the only Big Tech name that had not underperformed the market this year, foretelling another collapse for acronym investing. In fact, the top names in tech, which were responsible for a large part of the gains in the US market over the past decade, are mainly responsible for the market drop so far in 2022.
Keeping the faith in some of the mega cap tech stocks, analysts are now dropping letters out of the marketing Scrabble cup to form new Big Tech acronyms, such as Mant, Mat or Aaa.
Acronyms not only group dissimilar investments, they ignore capitalism’s one constant, which is churn. Though easy money and government rescues have corroded the function of markets and weakened churn, making it easier than ever for big companies to get bigger, the system is not fully broken. Eventually overvaluation, overconfidence and over-investment will be the undoing of the market’s biggest bets.
US companies led the major tech advances of the past decade and showed remarkable capital discipline until as recently as 2017. Then, spurred by huge cash flows and easy money, their spending accelerated, reaching wild levels during the pandemic, as digital services took off. Now this spending-driven growth model looks overstretched. The focus is returning to profitability at a moment when interest rates are rising, a turn that historically has always lowered stock valuations.
The question is what happens next. By late last week all of the Faangs — except Netflix, which never quite reached the list — were still holding on to a spot among the top 10 global companies by market cap. But the 2020s are young.
Since worldwide records began in 1980, only three companies (Microsoft, Walmart and General Electric) have held on to a place in the top 10 for two decades running. Otherwise, from such a high pedestal, the overwhelming majority underperform significantly in the next decade. Those that enjoy the most blindly undiscriminating hype on the way up are most vulnerable when the market starts to churn.