Equities: How worried should we be about valuations?
Equity markets have enjoyed almost a decade of constant growth, while record highs in Europe, Japan, and the US over the first two months of 2024 have reawakened concerns about valuations. Is it just bubble talk? Or are investors missing something?
Since 2023, chipmaker Nvidia has been the front runner of the ‘Magnificent Seven’ stocks (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia and Tesla), which have driven markets higher and higher. The company added $277 billion to its market value on 22 February this year alone,1 following news of a 265% increase in quarterly revenues.2
Propelled by the theme of artificial intelligence, stock market indices have surged towards what could in part be a bubble – but a particular type of bubble, given that it entails risks that are specific to just a few companies. It’s led some to draw parallels with the internet bubble of 1999/2000, finding similarities with the recent vertical ascent of Nvidia’s stock price and that of digital-networking company Cisco’s stock price during the late 1990s.
Yet markets are quite different in 2024. As Karen Kharmandarian, CIO at Paris-based boutique Thematics AM, pointed out: “When you look at the index composition, let's say the S&P500 in the 1980s, 70% of the industries making up the index were financials, real estate, and capital intensive businesses. Today, 50% is asset-light companies, especially in the tech space, which are profitable and have lots of cash on the balance sheet.”
Daniel Nicholas, Client Portfolio Manager at Chicago-based value investor Harris Associates, commented: “You look back to 99 and 2000, and we knew that computers were changing the world and we were looking at businesses that would utilize computers to make their businesses more efficient. And that's what we're doing with AI.”
To infinity… and beyond?
According to the latest Natixis Global Fund Selector Outlook Survey,3 while most see the rapid growth in AI as a positive – two-thirds say it’s the new space race –, nearly seven in ten (69%) don’t think valuations match company fundamentals. Indeed, they rank valuations as a top five portfolio risk.
“It's important to listen to what investors are saying, and when you look at indexes standing at all-time highs, valuations may appear stretched, at least on the surface, especially when the leadership is quite narrow,” said Karen. “That said, if you think of 2023 and the magnificent seven delivering 107% returns when the other 493 stocks in the S&P500 only delivered 13%, there’s [plenty] out there that you can add to your portfolios at attractive valuations.”
Navigating concentration risk and seeing innovation beyond the tech sector means looking for value in places that the market might not be recognising today. Isabelle de Gavoty, Head of Thematic Equities at sustainability specialists Mirova, said: “It’s the small and mid-cap universe that is really trading at the highest discount. I’ve been a fund manager for 25 years and I have never seen such a discount nor such an inefficiency. We focus on this part of the universe to find value for our investors over the longer term.”
Daniel added: “When you look at the global value index versus the global growth index and you compare the P/E multiples, global value is trading at a 47% discount to global growth. That's way higher than the historical relationship. So, while markets might be hitting new highs there are still areas that are cheap.”
In such a market environment, active expertise is required to uncover every opportunity. As Karen put it: “The setup for 2024 is quite attractive for active managers… you just need to dig a bit deeper and go into the granular areas of the market to find companies or segments that are still trading at reasonable levels.”
1 Source: Bloomberg, February 2024, https://www.bloomberg.com/news/articles/2024-02-22/nvidia-to-top-meta-record-with-nearly-250-billion-value-jump
2 Source: The Guardian, February 2024, https://www.theguardian.com/technology/2024/feb/21/nvidia-revenue-ai-artifiical-intelligence
3 Source: Natixis Global Fund Selector Outlook Survey 2024, https://www.im.natixis.com/intl/resources/2024-fund-selector-outlook-full-report
This article is based on the views captured during the Thought Leadership Summit in Paris in March 2024. Harris Associates, Thematics AM and Mirova are all affiliates of Natixis Investment Managers, and form part of our Expert Collective.
This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article. The reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services.
Past performance is not a guarantee of future results. All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
Since 2023, chipmaker Nvidia has been the front runner of the ‘Magnificent Seven’ stocks (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia and Tesla), which have driven markets higher and higher. The company added $277 billion to its market value on 22 February this year alone,1 following news of a 265% increase in quarterly revenues.2
Propelled by the theme of artificial intelligence, stock market indices have surged towards what could in part be a bubble – but a particular type of bubble, given that it entails risks that are specific to just a few companies. It’s led some to draw parallels with the internet bubble of 1999/2000, finding similarities with the recent vertical ascent of Nvidia’s stock price and that of digital-networking company Cisco’s stock price during the late 1990s.
Yet markets are quite different in 2024. As Karen Kharmandarian, CIO at Paris-based boutique Thematics AM, pointed out: “When you look at the index composition, let's say the S&P500 in the 1980s, 70% of the industries making up the index were financials, real estate, and capital intensive businesses. Today, 50% is asset-light companies, especially in the tech space, which are profitable and have lots of cash on the balance sheet.”
Daniel Nicholas, Client Portfolio Manager at Chicago-based value investor Harris Associates, commented: “You look back to 99 and 2000, and we knew that computers were changing the world and we were looking at businesses that would utilize computers to make their businesses more efficient. And that's what we're doing with AI.”
To infinity… and beyond?
According to the latest Natixis Global Fund Selector Outlook Survey,3 while most see the rapid growth in AI as a positive – two-thirds say it’s the new space race –, nearly seven in ten (69%) don’t think valuations match company fundamentals. Indeed, they rank valuations as a top five portfolio risk.
“It's important to listen to what investors are saying, and when you look at indexes standing at all-time highs, valuations may appear stretched, at least on the surface, especially when the leadership is quite narrow,” said Karen. “That said, if you think of 2023 and the magnificent seven delivering 107% returns when the other 493 stocks in the S&P500 only delivered 13%, there’s [plenty] out there that you can add to your portfolios at attractive valuations.”
Navigating concentration risk and seeing innovation beyond the tech sector means looking for value in places that the market might not be recognising today. Isabelle de Gavoty, Head of Thematic Equities at sustainability specialists Mirova, said: “It’s the small and mid-cap universe that is really trading at the highest discount. I’ve been a fund manager for 25 years and I have never seen such a discount nor such an inefficiency. We focus on this part of the universe to find value for our investors over the longer term.”
Daniel added: “When you look at the global value index versus the global growth index and you compare the P/E multiples, global value is trading at a 47% discount to global growth. That's way higher than the historical relationship. So, while markets might be hitting new highs there are still areas that are cheap.”
In such a market environment, active expertise is required to uncover every opportunity. As Karen put it: “The setup for 2024 is quite attractive for active managers… you just need to dig a bit deeper and go into the granular areas of the market to find companies or segments that are still trading at reasonable levels.”
2 Source: The Guardian, February 2024, https://www.theguardian.com/technology/2024/feb/21/nvidia-revenue-ai-artifiical-intelligence
3 Source: Natixis Global Fund Selector Outlook Survey 2024, https://www.im.natixis.com/intl/resources/2024-fund-selector-outlook-full-report
This article is based on the views captured during the Thought Leadership Summit in Paris in March 2024. Harris Associates, Thematics AM and Mirova are all affiliates of Natixis Investment Managers, and form part of our Expert Collective.
This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article. The reference to specific securities, sectors, or markets within this material does not constitute investment advice, or a recommendation or an offer to buy or to sell any security, or an offer of services.
Past performance is not a guarantee of future results. All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.
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