Comment: Thoughts on the Magnificent Seven

After Nvidia’s market value reached a new milestone of 2tn USD last week, investors might wonder what comes next for the Magnificent Seven companies (Apple, Alphabet, Nvidia, Meta, Microsoft and Tesla)

Both Ranmore Fund Management and MAPFRE share similar views in that, for most investors, it may be better to look for opportunities elsewhere to avoid potential bubbles and maximise returns.

Sean Peche, Portfolio Manager at Ranmore Fund Management, commented,

“- $84bn of Tech fund inflows in 7 weeks are = 4x that of 2022
– Causing “Long Magnificent 7” to be the “most crowded trade”
– worth more than the stock markets of Japan, France, UK, Mexico combined

yet

– Bezos sold $6bn of AMZN last week
– Berkshire sold some APPL last quarter
– And the Mag 7 ended the week lower

mmm

Meanwhile

– Treasury yields rose after “hot” CPI & PPI
– $3trn of commercial real estate loans matures through 2028
– And 22 US banks have commercial property loans = 3x their capital
– The Goldman Sachs Panic index is near decade lows
– As we enter the “worst 2-week period of the year going back 100 years”

With this kind of backdrop, I’m pleased the Ranmore Global Equity is invested very differently

– zero exposure to the Mag 7 and
– only 22% exposure to North American equities.”

Javier de Berenguer, Investment Manager and Fund Selector at MAPFRE Gestión Patrimonial commented,

“Our view at MAPFRE is that we need to be cautious when approaching these types of companies. We also believe that there is a base error in the market: consider the so-called Magnificent Seven, up to now considered to be on an equal footing.

Last year, the Magnificent Seven enjoyed very favourable tailwinds on the back of the AI boom, but we believe that from this year on, the paths their stock prices will take will be quite different, both in direction and magnitude. In the end, this is because the nature of their businesses is different, and some of them are oligopolies, but they can’t be treated in the same way.

What is clear is that this market concentration in only those seven companies leaves great opportunities outside of them, as is the case in the pharma sector. Though there is no spotlight on them, there are numerous high-quality companies generating impressive cash flows amid little cyclical sensitivity. We believe they should be included in a diversified portfolio.

Beyond technology, the market that until now has been favourable for risk assets seems to have paused after U.S. inflation data came out, along with other not-so-positive macroeconomic data. So, we don’t rule out any healthy profit-taking in the short term.

However, positive results from Nvidia could bring back this positive market sentiment.

HSBC also recently published its results, reporting earnings of $22.43 billion (€20.734 billion) in 2023, up 56%, below the $26.10 billion expected by analysts due to a three billion USD write-down in its investment in China’s Bank of Communications.”

Ismael García Puente, Head of Investments and Fund Selection at MAPFRE Gestión Patrimonial commented,

Nvidia

“The important thing is guidance and whether or not the expected strong growth in profit was met, which in this case was up a whopping 765%.”

USA Tech Sector

“We’re not looking at a bubble in the U.S. tech sector, given that we’re talking about companies that actually make profits with high margins and almost monopoly market shares.”

China

“Market sentiment is very negative as far as China goes, and that’s what’s affecting HSBC on the stock exchange. The bank doesn’t have direct exposure to the real estate sector, which is where the problems start, and it was the bank’s holding this position that has dragged earnings south.”

Hopes of rate cuts fade 

“The investment community has been trying to forecast the number of rate cuts and when they will kick in for a year now. Compared to the five or six expected hikes at the beginning of the year, between two and three are now expected, much more in line with the central scenario.

We are also looking at the divergence between U.S. and European analysts. While the former believe that the increases will happen sooner so as not to coincide with the presidential election, MAPFRE’s view in Europe is that there won’t be any cuts until the second half of the year.”