Between 2000 and 2011, mega-corporations were generally viewed as losers. These elephants were – and still are – among the favorite short positions of hedge fund managers, who prefer to invest their resources in leaner companies. And the performance of the latter benefited from global economic growth or, after 2008, from massive liquidity injections from central banks. Recently, however, with the economy close to recession and waiting to see if there will be further government support, it seems that investors have diverted to the relative security and geographical diversification offered by large companies.
In a world where uncertainty reigns and growth is very limited, this attitude seems more than sensible. It is not so strange that an equity investor overcomes his reluctance to pay a premium for the low risk profile of these companies in an environment where bond investors are willing to accept negative yields on the bonds of issuers considered safer. Large multinationals generally pay a relatively high dividend to yield-hungry shareholders and, at the same time, borrow on the bond market at rates slightly higher than the already very low rates of countries such as the United States and Germany. The combination of these factors has probably brought new interest to the stock giants.
On the other hand, one swallow does not make spring and one might therefore wonder if the recent performance of mega-corporations is just a coincidence. We don't believe so. Of course, a potential re-ignition of European central bank and Fed revolving rounds would bring fresh money flows and a temporary recovery in risk appetite. But the marginal effect of these measures will be increasingly contained, not counting the inflation risks associated with an expansive monetary policy. And this is especially true in the Eurozone, where these actions have been taken to counterbalance the persistent lack of competitiveness in the Mediterranean countries.
Given these indications, investors are likely to continue to favor large multinationals. After all, these companies offer more than just geographic, currency and product diversification. They also have strong balance sheets and pay out good dividends. And in a market phase where liquidity injections seem to be the only solution to stimulate the economy, this represents an interesting alternative to other investments. So in the stock market, for a while longer, big will be nice!
