Artificial intelligence has been the dominant investment theme in 2023 so far, leading to a surge in large-cap technology stocks associated with AI development. But according to investment manager Richard Bernstein Advisors, it’s important to look for growth opportunities beyond large AI-related stocks to mitigate the concentration risks in major indices.
From January to June, the seven leading AI-related technology companies — Apple, Microsoft, Alphabet (Google’s parent company), Amazon, Nvidia, Tesla, and Meta — accounted for 70 to 75 percent of the return generated by the S&P 500 index, RBA founder Richard Bernstein said in a webinar. The concentration of the “Magnificent Seven” has become so high in major indices that investors should look for other growth areas to diversify their investments, he said.
“What we’ve been saying is that the stock market should be viewed as a seesaw,” Bernstein said. “On the one side, you’ve got tech innovation, disruption, and AI. On the other side of the seesaw, you have virtually everything else in the world . . . But what’s interesting is that fewer and fewer stocks have stayed on the high side of the seesaw.”
Bernstein said his firm’s performance has lagged benchmarks because he and his team are “not big fans of the Magnificent Seven.” For example, RBA’s Global Equity Strategy is overweight in consumer staples, health care, and utilities. It has a negative exposure of 5.7 percent to information technology. The strategy returned 6 percent in the first quarter, compared to a 7.3 percent return by the MSCI ACWI Index. But Bernstein argues that diversification matters more than short-term returns.
“With the seesaw analogy, are there really only seven growth stories in the world?” he asked. For example, he believes European stocks have strong fundamentals and offer attractive investment opportunities. The average earnings of stocks within the MSCI Europe index relative to the average earnings of stocks within the MSCI U.S. Information Technology index has been trending upwards since the second half of last year, according to RBA’s data. “Valuations and fundamentals actually favor Europe over the U.S. tech sector,” Bernstein said. “Europe is expected to grow faster than the U.S. tech sector.”
Another growth opportunity is in Japan. Since the onset of the pandemic, the Japanese government has been trying to stimulate the economy by devaluing its currency. This tactic has historically been favorable for the Japanese stock market, according to Bernstein. Inflation has also picked up in Japan, with core inflation reaching a multi-decade high of 4.3 percent in January. It signals that the Japanese government may have successfully reinflated its economy, according to Bernstein. “We think there’s an opportunity there, perhaps the best opportunity in Japan in a very, very long time,” he said.
