Equities had a strong run in 2023, with equity mutual funds across themes making merry. However, the pace-setter last year came from distant shores. Mirae Asset NYSE FANG+ETF, a basket tracking an index comprising global mega-cap tech stocks, recorded a blistering 96% rise in NAV. The closest challenger, CPSE ETF, tracking an index of Indian public sector entities, fetched 75%. The NYSE FANG+ETF’s blockbuster show is bound to make investors take notice, but should you rush to add this table-topper to your mutual fund shopping list?
The acronym ‘FANG’ refers to the stocks of four popular US tech giants— Meta Platforms (Facebook), Amazon, Netflix and Alphabet (Google). The FANG+ index is a broader set of stocks, including Apple, Nvidia, Tesla, Twitter, as well as Broadcom and Snowflake. US big tech stocks, in general, scored big last year, coming off a painful 2022, when these stocks bled amid elevated interest rates, fears of impending recession and earnings disappointments. After the initial uncertainty around reversal of the US Fed’s rate tightening regime, the markets have been emboldened about rate cuts starting this year. The spectre of recession, which loomed large at one point, has been mostly dissipated, replaced by expectations of a ‘soft landing’ for the US economy. Beyond this, a build-up of expectations around artificial intelligence (AI)-related technologies has set off a feeding frenzy in businesses building significant AI capabilities. Together, these have given wings to the basket of tech behemoths, and have particularly lifted a highly focused tech-led index like the NYSE FANG+. Vikas Gupta, Chief Investment Strategist, OmniScience Capital, remarks, “The much anticipated recession in the US is unlikely to happen and inflation is also fairly under control. We expect rate cuts to start as early as March this year, with at least six likely cuts, higher than that suggested by Fed’s own estimates.”
Even as positives abound for continued momentum in these stocks, there are reasons to be more cautious in the future. While it was a particularly good time to buy the FANG+ index in late 2022, the risk-reward balance is no longer tilted in its favour. In fact, the FANG+ETF fetched nearly 2x the return compared to the tech-driven US-based Nasdaq 100 index. Individual names in the basket are now commanding lofty valuations, which leave little room for any earnings disappointment. Chipmaker Nvidia Corp, which is clearly front and centre in the AI race sweeping the Wall Street, saw its share price soar 239% last year. It now trades at a PE multiple of 63. After a 100% jump in its share price, autonomous carmaker Tesla trades at nearly 80 times earnings. Others like Microsoft, Apple and Amazon are also not cheap
Mega US tech stocks on a strong run
The recent rise in valuations makes near-term risk-reward unfavourable.
Siddharth Shrivastava, Head, ETF Products, Mirae Asset Mutual Fund, argues, “The momentum in the US tech sector continued unabated in 2023. While there are no significant red flags, especially if the earnings forecast is met, we have to advise caution on valuation for short-term investment periods, despite improvements in supply chains and recent flight-to-quality and AI-driven flows into mega-cap technology stocks.” He reckons that the potential for downward earnings revisions may affect the higher valuation companies. While stocks have staged a comeback in the US (based on the performance of the magnificent 7), the economic data and monetary conditions are becoming adverse, observes DSP Mutual Fund, in its Netra report for December 2023. “This is for the first time in many years that economic growth in the US is slowing, and at the same time, the US Fed is tightening monetary conditions. Usually, central banks and governments act countercyclically to bolster growth in a slowdown. This paints a sober picture for the US equities. Stay cautious,” the report states.
Even so, experts believe in the secular nature of recent growth vectors like AI and cloud computing. “We remain positive on the secular growth trends for cloud computing, machine learning and artificial intelligence, data centres, software, cybersecurity and semiconductors. A long-term investor should look to add exposure to transformational and industry-leading businesses participating in these themes,” insists Shrivastava. Gupta reckons that the basket as a whole is not overvalued from the medium-term perspective. “While a few stocks are expensive, valuations are not rich across the board. Revenue visibility and growth rates for these businesses continue to be high, supporting the valuations,” he adds.
However, the FANG+ETF constitutes a highly concentrated bet on the mega-cap tech businesses. While it is an interesting offering, it demands a certain conviction in the creamy layer of the US tech industry. Even the tech-driven Nasdaq 100 index is a more diversified offering. It houses many of the same stocks, only in lesser proportion than the FANG+ index. When things turn sour for the FANG+ basket, it affects the Nasdaq 100 index lesser than the dedicated FANG+ index. If investors are not comfortable with a focused bet, those seeking techbiased exposure to the US may consider the Nasdaq 100 index instead.
