According to portfolio manager Freddie Lait, the market’s preference for Big Tech firms this year is “shortsighted,” and the next phase of the bull market will include other industries with better value.
Shares of America’s tech behemoths have been buoyant so far in 2023. Apple closed Wednesday’s trade up almost 33% year-to-date, while Google parent Alphabet has risen 37%, Amazon is 37.5% higher and Microsoft is up 31%. Facebook parent Meta has seen its stock soar more than 101% since the turn of the year.
This small pool of companies is diverging starkly from the broader market, with the Dow Jones Industrial Average less than 1% higher in 2023.
After earnings season, the gap between Big Tech and the rest of the market became wider as 75% of tech businesses outperformed forecasts in contrast to a generally mixed picture across other industries and generally depressing economic data.
As central banks start to moderate and finally reverse the rapid tightening of monetary policy that has defined recent years, investors are also placing bets on further rallies. During the years of low loan rates, Big Tech outperformed for years before the Covid-19 outbreak gave it a significant lift.
However Lait, managing partner at Latitude Investment Management, told CNBC’s “Street Signs Europe” on Wednesday that although the market’s positioning was “rational” in the circumstances, it was also “very shortsighted.”
“I think we are entering a very different cycle for the next two-to-five years, and while we may have a tricky period this year, and people may be hiding back out in Big Tech as interest rates roll over, I think the next leg of the bull market whenever it does come will be broader than the last one that we saw, which was really just sort of tech and healthcare led,” Lait said.
“You’ve got to start doing the work in some of these more Dow Jones type stocks industrials or old economy stocks, to a degree in order to find that deep value that you can find in otherwise great growth businesses, just outside in different sectors.”
Lait predicted that as market participants discover value across sectors beyond tech over the next six-to-12 months, the expanding valuation gap between tech and the rest of the market will begin to close.
However, given the strong earnings trajectory demonstrated by Silicon Valley in the first quarter, he believes it is worth holding some tech stocks as part of a more diversified portfolio.
“We own some of those technology shares as well, but I think a portfolio exclusively exposed to them does run a concentration of risk,” he explained.
“More interestingly, it misses out on a huge number of opportunities that are out there in the broader market: other businesses that are compounding growth rates at similar levels to the technology shares, trading at half or a third of the valuation, giving you more diversification, more exposure if the cycle is different this time.”
He therefore advised investors not to be roundly skeptical of tech shares, but to think about the broadening out of the rally and the “narrowing of the differential between valuations,” and to “pick their moments to get exposure.”
