US big tech bulls are back on the rampage
Magnificent Seven could help you shoot for big gains
THE soaring US stock market has been the unexpected blockbuster hit of 2023. The so-called Magnificent Seven of technology stocks – Alphabet, Apple, Amazon, Meta, Microsoft, Nvidia and Tesla – have been the leading players in the ascent of the indices.
The tech-heavy Nasdaq 100 has leapt 37pc since January, while the S&P 500 has jumped by 20pc.
You may not have direct holdings in the Magnificent Seven, but you are unlikely to be a mere spectator to this action.
Many popular funds, such as F&C and Fundsmith, have substantial stakes in these titans.
This suggests that you should be asking yourself whether you want to stay around for more fun, or position yourself for a shift in sentiment. After all, the Nasdaq is trading at about 25 times the estimated earnings of its constituents. The ten-year average is about 21.
Some experts foresee further gains, despite the unease provoked by this week’s downgrading of US government debt by the Fitch Ratings agency.
John Stoltzfus, of Oppenheimer Asset Management, predicts that the S&P could rise by a further 7pc to 4,900 by Christmas.
Even Morgan Stanley’s Michael Wilson – a Wall Street arch-pessimist – sees a further upside, intimating there could be a repeat performance of 2019 when the S&P 500 gained 30pc.
Behind this optimism lies the belief that there are fewer interest rate rises to come, and excitement over the practical applications of generative AI (artificial intelligence).
It may be tempting to join the party now, betting that the Magnificent Seven will make further advances, on the basis that we are set to become even more dependent on their products and services in every aspect of our existence.
Ian Mortimer and Matthew Page, managers of the Guinness Global Innovators Fund contend that these ‘ high- quality’ businesses enjoy certain advantages that should ensure their longterm growth.
‘They have strong free cash flow which helps them invest in growth and innovation,’ they said. ‘But they also benefit from high barriers to entry that protect their market share.’
In light of these attributes, continuing to hold Magnificent Seven shares seems wise.
But buying at these levels carries considerable risk, since there is beginning to be more focus on the valuation of shares at the centre of the AI industrial revolution.
Jon Guinness, portfolio manager at Fidelity International, cites Nvidia, which makes the microchips for Chat GPT, the generative AI programme.
Stuart Gray, of Alliance Trust, says: ‘We have decent-sized positions in Alphabet, Amazon and Microsoft. But these are all based on analysis of their prospects rather than a collective view of the whole sector’s potential profitability. History shows that sentiment-fuelled rallies favouring one sector can easily turn into a rout, so it’s sensible not to put all your eggs in the tech basket.’
He suggests looking for ‘better, cheaper opportunities’.
FUND Calibre’s Darius McDermott says: ‘I have no doubt that AI will change the world, and is a viable long-term theme. ‘But caution in the short-term is sensible.’
Fidelity’s Guinness argues that some of these opportunities may lie in areas of technology currently out of the spotlight, such as PC, smartphones and ‘ memory’, the storage of data on a computer.
‘All three areas have been very weak for at least 12 months – smartphones have been weak for three,’ he says.
‘All three have cleared out any excess stock of product and so sales will start to recover. AI requires a lot of high-performance memory which sells at a much higher price than normal memory.
‘Micron, a memory specialist, may be behind in AI memory, but it will catch up. For mobile, Qualcomm, Skyworks Solutions, or Qorvo will benefit as demand recovers, especially in China. For PCs, Intel or Advanced Micro Devices (AMD) will benefit from normalisation. They may even be lagging beneficiaries of AI over time.’
A cost- conscious route into AMD and a mix of Magnificent Seven and more obscure names can be found in the investment trusts Allianz Technology and Polar Capital Technology, whose share prices are, respectively, at a 13.2pc and 13.99pc discount to the net value of their assets.
You may, however, be wondering about the smaller American companies in other fields that have been overlooked in the AI obsession of 2023.
McDermott suggests T. Rowe Price US Smaller Companies, Schroder US Mid- Cap and Artemis US Smaller Companies.
The Artemis fund invests in snack manufacturer Hostess Brands. Its specialities include the Twinkie sponge cake, launched in 1931, and the kind of comfort food likely to be enjoyed by many Americans wondering how AI will change their lives in the years to come.