The ongoing narrow market leadership of the ‘magnificent seven’ may be giving way to the ‘fab four’, however, Tapio Koivu, portfolio manager at Veritas Pension Insurance Company, said “disappointments” on the horizon for large-cap tech names are keeping his team alert.
While noting it is hard to be extremely bearish against a backdrop of strong US economic data, Koivu pointed to earnings season and a repricing of Federal Reserve interest rate cut expectations as areas of potential concern for investors.
Speaking days after Nvidia fell 11% in a single session – wiping more than $200bn from its market cap – he added large-cap tech has spearheaded a “huge rally” which may have been backed by earnings but has gone “a little too far, too fast” and he would be surprised not to see a backlash.
“The question is around those big tech companies, especially those which have been part of the AI hype. It starts to feel like expectations are very high and one could assume there will be disappointments along the way,” Koivu said.
“I am not sure if it will be this quarter or not, but this is the thing that keeps us alert at the moment.”
However, despite these concerns, he acknowledged it is hard to divert from the pack and begin taking off US large-cap exposure.
“It sounds dull, but we tend to be relatively neutral on those companies that can deliver huge surprises, but on the other hand, they start to feel quite expensive already and the expectations are quite high, so being overweight does not feel that good either.”
Small caps on the radar
Elsewhere, Koivu identified small caps as an area of potential opportunity but noted investors need to be selective in timing this exposure, as well as how to capture the space – with an equal weight broad market, or a small-cap basket with a quality tilt offering routes to offsetting some of the risks involved in the space.
“Even if it starts to feel like small caps are bottoming, things can change quite rapidly. They are quite interest rate sensitive as well,” he continued.
“When rates fall, that is perhaps when these companies start to perform and that scenario is perhaps closer in Europe than the US.”
Tactical opportunities with ETFs
Reflecting on the challenging inflationary backdrop of 2022, Koivu said his team was able to capitalise by targeting commodity producing countries and energy and materials sectors by using ETFs.
“There are quite a few similarities between today and the environment in 2022. Then it was about the war in Ukraine, now it is conflict in the Middle East.
“On top of that, interest rate expectations are being hiked and energy and metals are quite strong. Some of that playbook can be used again,” he concluded.
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.
