Insights et vue du marché
"Nifty" was a term used in connection with a long-term investment trend seen in the late 1960s and early 1970s. At its peak, a group of around 50 growth stocks dominated the US markets.
As with many investment trends, historical developments facilitated the emergence of the boom of the so-called Nifty Fifty. Due to the Vietnam War, national debt in the US during the mid- to late 1960s was a cause of great concern among investors. Many feared inflation, and therefore focused on investments that promised to ensure stable value.
Government bonds, on the other hand, were viewed with skepticism by investors due to the debt issue, even though absolute returns were around five percent. Investing in gold as an alternative was not an option at all, because private ownership thereof was prohibited in the US until December 1974.
Investors were, however, open to the stock market. In their search to preserve wealth and achieve positive real returns, many believed this was where they would find worthwhile investments. In order to combine security and returns to the greatest extent possible, an increasing number of investors started to invest in the stocks of large companies that dominated their market while at the same time reporting high growth rates. Among these were companies such as Coca-Cola, IBM, Johnson & Johnson, McDonald’s and Walt Disney.
The list of the Nifty-Fifty stocks popular during that time differs depending on the source. But there is consensus on 24 stocks (see table below).
The term Nifty Fifty should not be confused with the Indian benchmark index NIFTY 50.
The Nifty Fifty were established companies in their sectors. They had strong balance sheets and earnings, and attractive growth rates. In addition, they had increased their dividends often since the end of the Second World War. These stocks were therefore also called "one-decision stocks", or in other words, stocks that you buy once and never sell.
In fact, many analysts believed that the outlook for these stocks was so good that prices could only go up. The belief that kept the trend going was that the fact they were expensive was practically irrelevant, because the high level of growth would sooner or later justify any valuation. The consensus on this was so clear that even defensive fund managers had difficulty justifying themselves when they were not (or no longer) invested in these stocks.
The Nifty-Fifty stocks became more and more popular. What had once been an investment trend that was justified on the basis of fundamentals developed into exuberant euphoria: according to data from Jeremy Siegel, at the peak of the bull market in December 1972, the average price-earnings ratio (P/E ratio) of the Nifty Fifty reached 41.9. A comparison with the S&P 500’s P/E ratio of 18.9 for the same period shows that the Nifty Fifty had climbed to unimagined heights.
The fact that the strong focus on these stocks could be dangerous was also suggested by the author Andrew Tobias in his book “The Only Investment Guide You’ll Ever Need”. His book contains a conversation he had at the time with a high-ranking bank manager: "[He] told me that it was his bank’s policy to invest only in companies whose earnings they expected to grow at an above-average rate. What about companies they expected to grow at only an average or subaverage rate? No, he said, they did not buy stock in such companies. Regardless of price? Regardless of price."
But then in 1973/74, the bear market set in. Large segments of the price gains were wiped out. The belief that growth stocks could continue their above-average earnings growth almost indefinitely seemed to have disappeared. The events surrounding the Nifty Fifty were later reinterpreted as a valuation bubble – as an example of how speculation founded on exaggerated optimism can come to an abrupt end.
But what happened to the companies? In their study "The Nifty-Fifty Re-Revisited", Jeff Fesenmaier and Gary Smith show that they went on to develop very differently. Some of the stocks were able to exceed even the highest expectations seen during the boom in 1972. Others ended up disappointing expectations, and two companies went bankrupt.
The retailer Walmart had a positive surprise in store. In the 29 years up to 2001, the company’s stock achieved an annual return of roughly 27 percent. In contrast, IBM, which for many years had been the largest US company by market capitalization, performed significantly worse during that period than the overall market. However, the stock that fell the furthest was Polaroid. Having boasted a P/E ratio of 90 during the boom times, the company went bankrupt in 2001.
If you follow their development over decades, growth stocks can clearly be worth their high price – but not any price: according to Siegel, by 1998, the 25 stocks with the highest valuation in 1972 had achieved only about half the return of the 25 stocks with the lowest valuations. Fesenmeier and Smith’s verdict is similar. The authors use a different composition of the Nifty Fifty with a higher average stock valuation. Their finding? A P/E ratio that is ten points higher results in a two percent lower return.
These studies show that investors would have done particularly well with the "value stocks" among the Nifty Fifty. However, those who bought after the crash, so in the mid- to late 1970s, benefited most: at that time, the stocks were valued much lower than in 1972 and clearly outperformed the overall market in the decades that followed.
A look back at the developments surrounding the Nifty Fifty shows that a great company is not necessarily a good equity investment at all times. The more decisive factor is its valuation. The studies mentioned previously have found that moderately overvalued stocks can continue to outperform the market, but that in the case of the most over-valued stocks, investors are more likely to buy into exaggerated growth expectations that are not realized.
Incidentally, the fears of high inflation, which contributed to the Nifty Fifty trend, were only confirmed after the boom. In retrospect, this too is revealing: expectations can be a driving force in markets and support investment trends even if they do not materialize in the near future.
Header visual © Robert Knapp, Alamy.
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