Investors who have used passive index vehicles to buy into the United States market may wish to consider diversifying that holding as the strong growth in the price of technology sector stocks is being driven more by popularity than underlying valuations, an Australian boutique investment manager has noted.
Talaria Capital co-chief investment officer Chad Padowitz suggested the outsized performance of the technology sector in the S&P 500 should be considered.
“We think in this environment investors should be very concerned. When one looks at the index, which tends to be the place you get a broad representation of the economy, this is a very unique time where the index has been monopolised by a handful of companies, like, for example, the top 10 companies in the S&P 500,” Padowitz noted during a recent media briefing.
“At present they are 37 per cent of the index, but if they were equal weighted, it would 2 per cent, and those stocks are at the very expensive side of things and very much around one sector, which is the IT sector.
“It is quite uniquely concentrated as it is not just dominating the index in the US because the US is so large relative to the world, around 70 per cent of the global index, so if you dominate in the top 10 US stocks, they become a very big proportion of the global index.
“It means you are getting very concentrated risk as well and it is probably time to focus on things outside of that as you’re not getting the diversification you think you’re getting or the representation into the underlying economy.”
Talaria Capital analyst Max Welby added the prevalence of passive investing has led people to focus on the wrong issues when considering investing according to sector weighting.
“We think the stock market is potentially less efficient because you have this cohort of passive who have no regard to valuation and are buying because of the size [of stocks in an index]. So big stocks get bigger and the small get smaller, but there is no reference to the value of something because the cash still flows,” Welby said.
“At the moment, we have a period where it’s not really a question of these few stocks being ascendant, they dominate, but that will change, but we do see opportunities now in sectors that are out of favour.”
Padowitz pointed out the leadings stocks in the US will find it hard to grow due to the law of large numbers and used Apple as an example, noting its revenue over the past two years has remained flat.
“This is because the iPhone 16 is not that much different from the iPhone 15 or the iPhone14 and people already have an iPhone or an iPad or a Mac computer so they’ve run out of new customers,” he said.
“It was one thing 10 to 15 years ago when a company had 2 to 3 per cent of the market and were getting market share quickly, but that game is done, so you should be concerned at the level of large numbers.”
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