Some investors look to diversify amid big tech rally -Breaking
By David Randall
NEW YORK/Reuters – Investors are looking for ways to diversify from the technology sector, which is a leader in markets for decades.
The tech stocks rose this year and have helped propel the index to record heights with a 25.1% gain year-to date in 2021.
Investors are concerned that valuations have reached a point where they could be considered to be too high. Google-parent Alphabet (NASDAQ:), for instance, trades at a 12-month forward price-to-earnings ratio of 26.6, compared to a valuation of 21.1 for the S&P 500.
Apple Inc (NASDAQ) has a 26.2 forward earnings value, and the Information Technology sector is up almost 28% this fiscal year with a forward PE of 26.4.
While gains in big technology stocks have boosted the S&P for more than a decade now, their heavy weighting could sink the index if tech falls out of favor. Microsoft (NASDAQ:), Apple and Amazon, Wall Street’s three most valuable companies, account for close to 15% of the S&P 500’s market capitalization, according to Refinitiv Datastream.
Fund managers in last month’s BoFA Global Research Survey named “long tech” as the market’s most crowded trade and had collectively reduced their “overweight” positions in tech stocks to the lowest level since May. The market’s top four most crowded individual stocks are Microsoft, Apple, Alphabet and Amazon, according to a recent analysis by research firm Bernstein, incorporating factors such as institutional ownership and price momentum.
Over the last decade, limiting exposure to tech stocks has had a negative impact on portfolio performance. This makes investors cautious about cutting down too heavily. Still, some are looking to broaden their portfolios to reduce their exposure to the sector’s biggest names.
Natixis Investment Managers Solutions Portfolio Strategist Garret Mellen believes large stocks of technology companies may be susceptible to investors who want to capture profits or move money to other areas. Melton has bought shares in energy and financial companies that he thinks will reap the benefits of rising inflation and an economic recovery.
Melson explained that “we’re in the group where the growth rate of the economy is being underestimated this year and next.”
DataTrek Research’s analysts think that the growth of sectors, such as energy and financial companies, will be a boon for big tech stocks in year-end.
“Technology has been a winning group for many years, and we expect it will continue to be so in the future,” they wrote in a Friday report. “But as investors consider where to allocate capital today … we think it likely they will seek out sectors with more exposure to improving economic fundamentals.”
On Friday, the U.S. posted strong employment numbers. The news that a new experimental antiviral drug was in development also helped to brighten the economic outlook. Pfizer (NYSE:). Travel stocks benefited, with the S&P 1500 airlines index climbing 7% on the day. [.N]
Next week’s U.S. consumer prices data will provide investors with insight into the inflation rate.
Janus Henderson portfolio manager Denny Fish said that he has been motivated by high-valued technology sectors and inflation worries to find smaller companies than giants, which will allow him to reap the benefits of larger stock positions.
According to Fish, shares of Atlassian, an Australian software developer company (NASDAQ:) Corp PLC is a bullish stock. Their product management tools “augment Microsoft’s suite of applications,” he stated. Shopify, a Canadian e-commerce firm (NYSE:) Inc) also benefits from Amazon’s expansion, is another company that Fish believes in.
Fish explained that Fish was looking for emerging companies which have greater growth potential than large companies, and that offer rational valuations that can outperform over multiple years.
Many investors continue to be bullish on stocks that are tech-focused, due to their solid earnings history and track record of high growth.
Saira Malik is the chief investment officer at Nuveen for global equity. She’s looking for companies in tech that can benefit from higher inflation, and are not lagging behind the general market rally.
She believes shares of Amazon.com Inc (NASDAQ:), which has trailed the market with an 8% gain this year, will be one such “catch up trade,” powered by growth in e-commerce.
Malik stated, “Now is the time to be selective.”