SJP's Onuekwusi trims US exposure on 'concentration conundrum'

In a roundtable dinner on Wednesday (29 November), Justin Onuekwusi said the FTSE 100 wealth manager is spreading its risk asset exposure, with an overweight to Europe, the UK and emerging markets, which he said are trading at more attractive valuations.

The CIO noted that Apple, Amazon, Alphabet, Nvidia, Meta, Microsoft and Tesla, known as the ‘Magnificent Seven’, now represent over a third of the S&P 500 index, a concentration risk that he said has been exacerbated by the rise of index funds.

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The S&P 500 index is up nearly 19% year-to-date, according to data from MarketWatch. However, without the performance of the Magnificent Seven stocks, the index’s gains are “pretty much zero”, Onuekwusi said. 

“The risk you are taking to get that return is so significant that we are simply not willing to take sizable risks relative to market cap in that area,” he said. “That risk is going to play out, and actually we saw in 2022 what happens when that snaps back aggressively. 

“It does not make sense to continue to pay up significant prices for the earnings that you are going to get from these large tech companies. I am not saying that they will not continue to outperform, [but we] are not willing to take the risk to generate those returns.”

Onuekwusi noted that during the most recent earnings season, mega cap tech stocks such as Google have been punished by the markets for earnings misses, which he said has had an impact on the rest of the market. 

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“What I worry about is that you are going to have an earnings miss, and then essentially people in those stocks, typically in big index strategies, will just start to pull liquidity out of the market and have an impact on the whole market, at least initially,” he said. 

“The managers that we invest in do not necessarily have massive exposure to those large tech stocks. What we are worried about is actually a bit of a liquidity event, of money just coming out in a very short space of time and having an impact on the rest of the market.”

Onuekwusi said small caps across the world, and particularly those in the UK, look more attractive from a valuation perspective relative to long-term history, as well as value-tilted equities. 

“The dilemma you have is that, if there is a slowdown, if there is a recession, do we really expect small caps to outperform large caps? Probably not, but from a valuation perspective, they are starting to look a lot more attractive,” he added.


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