For much of the past decade, investing globally has largely been a binary bet on technology. Those managers with large weightings towards the so-called ‘Magnificent Seven’ tech businesses, such as Amazon and Tesla, have tended to do well, while those with their focus elsewhere have not. That was supposed to change at the start of 2023 as interest rates rose, but there have been few signs yet of the situation broadening out.
All roads apparently lead to technology. If investors are pessimistic and want defensive stocks, they have looked to big tech – but the same holds if they are optimistic and hunting for growth. It has also been the go-to option for artificial intelligence (AI), cloud computing or e-commerce. This can be seen in the difference in returns from the S&P 500 – up 8.5% year to date – compared with the equal-weighted S&P index, down 5.1%.
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“In spite of the rise in bond yields, which could have hit growth stocks, what we have in fact seen is that the earnings resilience of the large technology stocks has allowed them to do well this year,” says Willem Sels, global chief investment officer at HSBC Global Private Banking & Wealth. “While technology is generally classified as a cyclical sector, some investors are looking at the large tech stocks as relatively defensive, thanks to their diversification of earnings streams.”
Surely, though, there must be opportunities elsewhere for managers in the global sector. Emerging markets, for example, are growing at pace and are less overloaded with debt than their developed market peers. For its part, Japan is reviving, while areas such as the UK and Europe do offer some compelling valuations. At the same time, dividend growth is accelerating, creating opportunities in income stocks.
See also: Magnificent Seven: Are investors pressing ‘pause’ on their love affair with tech giants?
Rathbone Global Opportunities manager James Thomson flags up a lack of conviction among investors, leading them to those stocks providing resilient or accelerating profit growth. “Only 27% of S&P 500 stocks are beating the S&P 500 year to date – the lowest in more than 30 years,” he says. “Most of the returns for global funds have been driven by the Magnificent Seven in the US: Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
“Pessimists say this market concentration is proof the stockmarket is near a cliff edge. We don’t think so, however – this is the most widely anticipated recession in history. We believe these binary moves in a small number of stocks are symptomatic of a world where growth is hard to find.”
To read more, visit the November edition of Portfolio Adviser Magazine
