Where 2022 will be defined as a brutal market for just about every asset class and investment, 2023 is proving to be a confounding one.
With interest rates climbing to their highest level since the global financial crisis, and at an alarmingly fast rate, we were meant to be entering a period of underperformance for growth assets and witness a new cycle where defensive and cyclical assets begin to contribute more.
However, with the boom in artificial intelligence and people still prepared to pay for growth, we have seen a reversal of 2022 and a return to the recent holding pattern: outperformance by a handful of big tech names in the US.
Indeed, gone are the Faangs, only to be replaced by the equally vacuous ‘magnificent seven’ – better known as Apple, Microsoft, Amazon, Alphabet, Nvidia, Tesla and Meta.
To highlight the power these companies have had on the market, and just how narrow the rally this year has been, the MSCI USA index is up over 10 per cent over a year.
However, if you just looked at those seven companies, the returns are nearly 60 per cent. Simply put, growth companies remain as in vogue as ever.
This presents challenges for balanced investors. Keeping up with a market dominated by a handful of very large companies is going to be difficult, and the underperformance will last until the market leadership broadens.
This period of market leadership is really calling into question what an overvalued company is. Nvidia, for example, is trading at more than 100 times its trailing 12-month earnings.
Historically, this valuation would look like irrational exuberance, but in today’s market, having no exposure would have meant that you fell behind.
For a client with a medium level of risk, however, we should not be encouraging large positions in such a small number of companies.
As investors we need appropriate levels of exposure so that when the market does turn – and as 2022 showed it can turn very quickly – client portfolios remain well balanced and diversified so they can ride out the shocks as much as keeping pace on the upside. After all, there is a reason you cannot construct a fund with only seven stocks in it.
So where can investors turn during such a time? Well, with inflation remaining a nagging threat despite moderating in recent months, quality as a factor remains attractive in both the growth and value sectors of the market.
These businesses, of which big tech are a part, have staying power and will utilise their strong market positions and balance sheets to power through this high interest rate environment.
But crucially, taking both sides of the growth-value coin gives investors an added bonus of shareholder returns. Quality businesses have been able to pass on their costs to customers and thus contribute to dividends holding up well in this environment. The FTSE 100 currently yields 3.78 per cent.
