After months in which enthusiasm for technology seemed to protect investors from geopolitical instability, last week’s declines brought back to the markets a feeling of instability that many believed had been overcome, and the ghosts of the crisis. dotcom They fly back to the screens. After the highs recorded by the main European and US indices (including, for the first time in almost two decades, the Ibex), the recent volatility has been the perfect excuse for many investors to cash out and seek shelter before the storm.
Even though in recent weeks Wall Street executives such as David Solomon of Goldman Sachs or Ted Pick of Morgan Stanley have warned that stock markets could correct more than 10% in the medium term, a good number of analysts continue to see reasons for optimism. “Consolidation is healthy after the strong rally and excess enthusiasm around artificial intelligence,” Barclays experts point out. Along the same lines, Josep Prats, manager of the Abante European Quality fund, believes that, with sustained growth, low inflation and stable rates, investing in the stock market remains attractive. In this scenario, many believe that the instability shaking Wall Street could be an opportunity to rebalance portfolios across sectors and regions.
Thomas Friedberger, CEO and Chief Investment Officer of Tikehau Capital, believes that “the current market environment presents elements that justify a critical review of the geographical positioning of stocks, especially considering the risk of correction in the United States”. For Friedberger, Europe offers an attractive investment opportunity, with several key catalysts: expansionary fiscal policy, accommodative monetary policy – the ECB has cut rates by 250 basis points since the start of the reduction cycle –, reasonable valuations and slightly lower corporate debt levels. “For several years we have favored investments in companies that help build this resilience,” underlines Friedberger.
Unlike Wall Street, where the technology sector – now in the spotlight – concentrates over 40% of the market, in the Old Continent its weight barely exceeds 8%. “In comparison, and also due to the lack of highly innovative technology pioneers, the Stoxx 600 offers fewer opportunities, but also much less risk in case we are experiencing an AI bubble,” says Michael Illig, manager of Flossbach von Storch. While economic history reminds us that when the United States sneezes, Europe catches a cold, if investors begin to perceive technology companies as a source of uncertainty, they could accelerate a rotation into the industrial and financial sectors, the two sectors with the heaviest weight in the European stock market.
The euphoria for artificial intelligence has been concentrated in the big American names, and the fear of being excluded has pushed many investors to buy shares of Nvidia, Microsoft or Apple. This has done nothing but increase a concentration that is also amplified by passive investments: the so-called magnificent seven (Nvidia, Microsoft, Google, Apple, Amazon, Meta and Tesla) represent 40% of the portfolio of funds that replicate the S&P 500. Prats considers this concentration one of the main risks and recommends prudent investors not to hold more than 20% of their portfolio in a single sector.
In addition to the lower technological weight and the stimulus plans to reactivate growth, Oliver Cassé, manager of Sycomore AM (subsidiary of Generali Investment), highlights the advantage of valuations: “Concerns about valuation are less relevant in Europe, given that it has a discount of between 35% and 40% compared to the United States”. One example is ASML, a maker of chipmaking equipment and one of the companies most exposed to a possible tech correction, which trades at a PER (price-to-earnings ratio) of 36x, high, but lower than Nvidia’s 52.8x and far from Palantir’s 407x.
Ignacio Dolz de Espejo, director of investment and product solutions at Mutuáculos, acknowledges that valuations of some subsectors of the US stock market are “starting to look excessive and difficult to justify even in the best of times”. The manager admits that gaining immunity from a sudden fall is impossible, but the impact can be mitigated. “We do not recommend abandoning the stock market, but rather adjusting exposure to protect portfolios from risks such as economic slowdown or high valuations. At Mutuáculos we are tactically reducing the weight of equities, cutting exposure to the United States in favor of Europe,” he clarifies. For his part, Luca Paolini, chief strategist at Pictet AM, is betting on the Swiss market, supported by improving macroeconomic prospects and attractive valuations, where it is still possible to find high-quality companies with solid dividends.
While clouds are once again covering the stock market sky, Josefina Rodríguez, an economist at Vanguard, takes the drama out of the picture and reminds us that high valuations, in themselves, usually do not cause corrections, even if they make the market more vulnerable to possible disruptions, such as a recession or geopolitical conflict. While the expert points out that, unlike the dotcom crisis, current technology companies generate profits, Illig warns that the main risk now is to see how profitable they can make their huge investments. Prats agrees: Even if big tech companies have maintained high revenues and margins so far, no one can guarantee that this increase in profits will continue. And, above all, that they do it at the current pace. “Large chip purchases may be maintained for another two or three years, but there will come a time when they stabilize. Furthermore, it may appear that competitors are taking market share away from American companies,” he points out. The big names will continue to make money, but with more moderate growth; and at current valuations, such a slowdown could trigger a deeper correction than many investors are willing to tolerate.
Despite the noise triggered by recent declines, Diego Fernández Elices, investment director of A&G Global Investors, reminds us that markets are also breathing and that corrections are part of their natural beat. “It is its normal pace and it is also healthy. A decline of 10% per year is normal; even 15% every two years. And every three to five years we must be prepared for declines of 20% or even greater,” he explains. The expert warns that although more and more voices are warning of the risk of a bubble around artificial intelligence, episodes such as the dotcom explosion or the collapse of Lehman happen once in a while.
At ING they share this vision and remember that financial crises almost never erupt when everyone announces them. “In any case,” they add, “we are gradually entering the next phase of the AI boom, in which it will be the application, and not just the promise, that will make the difference.” For Fernández Elices, the alternative to catastrophism is rational investment: “There is no reason to play all or nothing. There are still great opportunities to select values, and even entire sectors, regardless of themes, noises and fashions”, he concludes. If enthusiasm for artificial intelligence cools, European prudence and balance could rise again.
