Value in the markets beyond the “magnificent seven”

The latest to fuel that interest has been Nvidia. The semiconductor company beat expectations for the fourth quarter of 2023, posting revenue of $22.1 billion versus the $20.4 billion expected, while profit came in at $12.285 billion, six times higher than in the previous year. These results were welcomed by the markets: the company gained 16% on the stock market, which represented an increase in capitalization of more than $277 billion.

The strong concentration in the indexes and the interest in these companies means that when growth expectations fail, the fall is just as hard as the rise. That’s been the case with Tesla, as Javier de Berenguer, Investment Manager and Fund Selector at MAPFRE Gestión Patrimonial, explains in the Finect Alpha podcast.

“Tesla is a good example of how expectations of growth that are so high and extrapolated into the future run the risk of not being met. And when there’s a lot of speculation and the results fail to deliver, the market corrects the share price,” he explains.

The fund manager and selector sees value in equities beyond these companies, whose valuations are already very high. “There are other companies of similar quality to the big ones that have returns on investment, a good margin over the cost of capital, that can do it all sustainably, and are located in growing markets… They bring together all the variables that a manager would like to have and, on top of that, with attractive valuations compared to the big players,” says De Berenguer.

Among these alternative companies, De Berenguer highlights U.S. small caps benefiting from the strength of consumer spending, and others that are larger, but from “less attractive and dynamic” sectors, such as consumer staples, health care and some pharmaceuticals.

The high degree of concentration in the U.S. market has also been seen at other times elsewhere in the world, although it tends to occur in more diverse groups of companies with different narratives, unlike in the U.S. with AI. In terms of valuations, other companies aren’t as expensive, and they have a more moderate growth profile and more stable earnings.

De Berenguer also discusses the large volumes of passive management that we now have, and that were not at these levels in past times of market concentration. “I think we’re now talking about around 60% or 70% of the developed markets. That’s a lot, and these accompanying flows greatly inflate the valuations, also when they go against the grain,” he stresses.

How do you manage the current market environment?

From the point of view of fund selection, De Berenguer points out that MAPFRE Gestión Patrimonial prefers to invest in “processes and teams,” rather than in star managers who run a higher risk.

“It’s dangerous for them to be late or leave early. At a general market level, in 2023 we saw many managers chasing returns in the months of March and April. I would venture to say that many of the managers investing in Nvidia had no positions prior to February last year, which is indicative of the chase for returns,” he explains.