Principal Asset Management is still overweight large cap US technology names despite their recent market dominance.
Investors have grown nervous about the growing influence of the largest US technology stocks on the wider equity market.
Given that six of the largest US tech names make up roughly 30% of the S&P 500 index, it has created concerns on concentration risk for portfolio managers and asset allocators.
Despite these risks, Todd Jablonski, CIO and global head of multi-asset and quantitative strategies at Principal Asset Management, said his firm remains strategically overweight these names.
“We like large cap US, and believe that mega cap tech group can continue to perform,” he said at a recent investment summit in Hong Kong.
His colleague, George Maris, head of global equities noted how during past levels of high market concentration, the free cash flow margins of the largest companies were close to zero – a starkly different scenario to today.
“The Magnificent Seven today generate a 20% free cash flow margin,” he said. “That is double the free cash flow margin of the rest of the US market.”
“These are not companies that are big by accident. They are incredibly profitable, are growing faster than the market, and they have net cash balance sheets.”
Indeed, this market dominance has more recently caught the attention of regulators. The US Department of Justice indicated earlier this month that it is considering a breakup of Alphabet’s core businesses, for example.
But Steve Larson, portfolio manager, global equities, suggested this should not be a major concern for investors.
“The underlying pieces are likely worth more than the current sum of the business,” he said.
Bullish Japanese equities and gold
Aside from US large cap tech, Jablonski said he also favours Japanese equities over Europe. Japan is one of the firm’s tactical overweight positions in its portfolios.
“Despite the Bank of Japan’s effort to make investing in Japan noisy and difficult, I highlight buybacks per share in the Japanese equity market.”
“Japanese equities are a great place to go for shareholder return in the form of both dividends and or share buybacks.”
He pointed to how Japanese buybacks have dramatically increased over the past few years. A record 10trn yen ($71bn) was set aside by listed Japanese companies in the April-to-September half for buybacks.
Indeed, 2024 is on track to break more records for Japanese stock buybacks as ongoing corporate governance reforms and a shift in management attitudes start to favour enhancing shareholder value.
Meanwhile, Principal AM has been “underweight Europe for some time,” he said. “I see a certain sclerosis in Europe, a rigidity, an inability to evolve, a structural one.”
On the other hand, Jablonski added that he is overweight gold for the first time in his career: “I’ve been managing money for a couple of decades, but I finally moved to a gold overweight,” he said.
He pointed to the growing and steady demand for gold from Chinese buyers, as well as India’s recent measures to reduce its gold import duties from 15% to 6%. India has been a longtime buyer of gold bullion.
“So we now have India and China – that’s 40% of the world’s population who like gold.”
“Also, other central banks are now moving to gold for diversification: commodities are a function of supply and demand, so a lot of increased demand leads to a higher price. So, we are optimistic on gold.”
