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Is it time to buy the dip in global growth stocks?

Fri 26 Apr 24, 1:52pm (AEST)
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Key Points

  • Pollak hasn't been buying the recent dip in global growth stocks. In fact, he revealed he had been selling down Loftus Peak's positions in Nvidia and AMD over the last few months.
  • Thomas argues that, with a longer-term horizon, Amazon and Microsoft still remain attractive.

It's been a difficult month for global large-cap tech stocks, with investors' dreams of Fed rate cuts now being pushed further into the future.

US economic data has been more positive than hoped, with 303,000 jobs added in March, unemployment data falling from 3.9% to 3.8%, consumer confidence remaining elevated, and inflation (measured by CPI) remaining stickier than expected, rising 0.4% during the month.

It's seen Fed Chair Jerome Powell question whether the central bank will be able to lower US cash rates this year, arguing it will take "longer than expected" for him to feel confident that rates should be headed lower.

Since hitting a high in late March, the S&P 500 has sunk around 5% - meaning, it has now hit the halfway mark to correction territory. However, for global tech stocks, namely, the Magnificent Seven, it's been far, far worse.

Apple (NASDAQ: AAPL) and Tesla (NASDAQ: TSLA) are no longer magnificent, with their share prices departing that of their peers in 2024. These stocks have seen their share prices fall 11% and 43% into the red, respectively, since the beginning of 2024.

In the last month though, this contagion has spread further, with growth darlings Nvidia (NASDAQ: NVDA), Microsoft (NASDAQ: MSFT), Amazon (NASDAQ: AMZN), and Meta (NASDAQ: FB) all sinking into the red to various degrees - although, by far the worst impacted has been Nvidia, down 16.3% in just one month.

Alphabet (NASDAQ: GOOGL), on the other hand, has lifted more than 4% in that same period.

So is it time for investors to buy the dip on the US growth juggernauts? Or should investors still holding take profits like the rest of the market?

Livewire reached out to Magellan's Nikki Thomas and Loftus Peak's Alex Pollak to find out.

Why the recent sell-off?

Thomas argued that there were a couple of reasons for the recent sell-off in global growth stocks, including stickier-than-expected inflation data and rate cuts being pushed out to the end of the year... if that.

"The falling inflation story is losing its momentum. We had six rate cuts priced in at the beginning of the year. Now, we're lucky to have two priced in, maybe even less than that. And there's a growing narrative that we may get no rate cuts," she explained.

"Of course, the US election adds complexity around that, because typically the Fed would not want to cut straight into an election, because it can be seen to be politically sensitive to do that."

In addition, in the midst of reporting season - results have been good, but not as great as investors may have expected.

"It feels like a period of consolidation after valuations got a little bit stretched. Markets tend to need a breather," she said.

"I wouldn't be surprised if this is not a big sell-off. It could get worse, but it depends on the outlook statements from big names like Microsoft, Nvidia and Amazon."

Similarly, Pollak pointed out that the Magnificent Seven were "priced for perfection", and now that rate cuts have been pushed out far further into the future, investors are finding it significantly harder to capitalise lower interest rates into share prices.

"US and global investors were expecting a 75 basis point rate cut over the course of 12 to 18 months starting in March of this year... in other words, last month," Pollak said.

"What they're actually getting is not 75 basis points starting in March, but 25 basis points starting in December and possibly another one next year. To some degree, investors had been holding on by their fingernails waiting for these mythical rate cuts. And Powell, being the good central banker he is, has basically slammed the brake."

Is this an opportunity to buy the dip?

Pollak hasn't been buying the recent dip in global growth stocks. In fact, he revealed he had been selling down Loftus Peak's positions in Nvidia and AMD (NASDAQ: AMD) over the last few months.

"We want to recycle capital from the most heavily exposed AI companies such as AMD and Nvidia into those still exposed to AI, but trading at much lower valuations," he said.

"We've recycled capital away from the most expensive highest growth names on the basis that they had done 80-ish per cent of their trick, into companies that are much lower weighted into AI, like TSMC (TPE: 2330) and Qualcomm (NASDAQ: QCOM)."

He hasn't sold out of his positions in Google, Microsoft or Amazon. And while he admits, Lotfus Peak got "caught out on Netflix (NASDAQ: NFLX)", he revealed he was still "very active" in streaming positions - like Netflix and Roku (NASDAQ: ROKU), in e-commerce - like MercadoLibre (NASDAQ: MELI), and digital payments - like Adyen (AMS: ADYEN).

Meanwhile, Thomas said Magellan currently wouldn't invest in Nvidia as it's too volatile, but notes for the other Magnificent Seven, investors should wait for companies to report before they rush into positions in these stocks.

"Why would you rush in ahead of seeing the latest set of numbers? Investors can get a lot of information when companies report results. So anything that hasn't yet reported, just wait and see what they report," she said.

That said, for investors with a three-to-five-year time horizon, there's no harm "dribbling" some money in, she added.

"I don't think this will be a major correction for markets, so if your timeframe is long, you can buy great companies with enormous cash flows and growth ahead of them, as most of these businesses do," Thomas said.

"If your timeframe is short, then you're going to be much more sensitive to P/Es and short-term earnings trajectories and what companies say in results."

She argues that the Magnificent Seven look "fully priced" when analysed from this short-term view. However, with a longer-term horizon, Amazon and Microsoft still remain attractive.

"If I look at Microsoft at $400 and a sensible scenario for the next three to four years, I think you can make 15% per annum. I think that's very attractive," she said.

"Yes, investors are excited about the AI story and the opportunity that's ahead of it, and we don't know when Copilot will become profitable, but it will at some point. The cloud business for Amazon and Microsoft will re-accelerate from the slowdown in optimisation that we've seen."

Thomas adds that she doesn't think the Magnificent Seven are particularly expensive, but given they've had a very good run in 2024 - she doesn't believe there is a lot of upside ahead of them in the short term.

Instead, she's been adding to Magellan's position in UnitedHealth Group (NYSE: UNH) - a "lovely compounder that's quite resilient" and Netflix, which was sold off after its recent quarterly update.

"We've added a little bit more to UnitedHealth after some short-term noise around a cyber attack. They've already reported, and they'll come through that in good shape, even carrying an additional cost of working through that situation," she explained.

"Netflix sold off last week after their result. The market was a bit discombobulated by the fact that they're changing their disclosures around subscriber numbers. I think that's sensible. It's a very strong growth business with incredible margin upside ahead of it."

This article first appeared on Livewire Markets.

Written By

Ally Selby

Content Editor

Ally Selby is a content editor at Livewire Markets, joining the team at the end of 2020. She loves all things investing, financial literacy and content creation, having previously worked for the likes of Financial Standard, Pedestrian Group, Your Money, Sky Business and Sky News.

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