Party over? If overweight, pare exposure to US technology companies

Allocation to it should not exceed 25% of your total exposure to country's market

Seven of the largest US technology companies — Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla — have added $4.5 trillion to their market capitalisation since the start of this year. The Nasdaq-100 is up 44 per cent, the NYSE FANG+ index has gained 81 per cent, while the broader S&P 500 index is up only about 20 per cent year-to-date (YTD).

Narrow, AI-driven rally

The rally in US stocks has been driven primarily by the seven names mentioned above. “If you exclude them, the US market hasn’t moved much, which is why there is a large divergence between the performance of the NASDAQ-100 on the one hand, and the Dow Jones and the S&P 500 on the other,” says Alekh Yadav, head of investment products, Sanctum Wealth.  

Investor fancy for generative artificial intelligence (AI) is propelling this rally. “Companies like Nvidia, the chipmaker, cloud computing names like Amazon, Microsoft, Google, etc.  are benefiting from this trend,” says Rajeev Thakkar, chief investment officer, PPFAS Mutual Fund.

According to Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisers, “Following the launch of ChatGPT, there is a growing conviction among investors that companies in this space will capitalise on the adoption of AI by businesses.”

Thakkar is of the view that the current rally is only recouping the losses of 2022. The NASDAQ-100, he points out, hasn’t yet surpassed its previous high.

Valuations turning expensive

Some US technology stocks could well be in bubble territory. “After the sharp run-up, risks would be especially high in stocks where the expected revenue and cash flows don’t materialise,” says Thakkar.

Yadav, too, is of the view that the risks in these stocks have become skewed towards the downside.

Basing one’s investment strategy on a single technology can be risky as trends change rapidly within this sector. “Owing to the dynamic nature of technology, a seemingly attractive technology today may not hold the same promise in the future. A pertinent example is the Metaverse. Today, the enthusiasm for it has diminished noticeably compared to a couple of years ago,” says Dhawan.

Longer-term opportunity

Some experts are of the view that Indian investors should maintain exposure to the NASDAQ-100 as it is an attractive play on the technology and innovation boom. “Digitisation and technology are here to stay. Tech companies will only become bigger over the next 5-10 years,” says Vivek Banka, co-founder, GOALTELLER.

He adds that the NASDAQ-100 was rebalanced recently. “Exposure to some of the stocks, whose weight in the index had become high, has been trimmed,” he says.

Avoid FOMO

With the tech indices trading above their long-term average valuations, new entrants have a significantly smaller margin of safety than those who got in at the start of the year. “Do not succumb to the fear of missing out and make large investments in one go. Instead, invest in a staggered manner to average out your purchase cost,” says Dhawan.

Banka suggests investing in a NASDAQ-100-based fund-of-fund only if one has a long horizon and can hold on through a correction.

Pare allocation if required

Existing investors should adhere to their asset allocation. “If your exposure to US funds is 20 per cent of your equity portfolio, then exposure to the technology sector should not exceed 25 per cent of this exposure,” says Dhawan.

According to Banka, investors in an Indo-US diversified equity fund (such as Parag Parikh Flexi-cap) may continue as this fund has limited exposure to US technology stocks (17 per cent) and enjoys equity taxation (pure international funds are taxed like debt funds).

Dhawan says investors in FANG+ based funds are at greatest risk as this index has only a few stocks and is not diversified across sectors. “NASDAQ-100 investors face similar risks, but to a lesser degree due to the 100 stocks in this index,” he adds.

He suggests that retail investors first build a core exposure through a broad-based index, such as the S&P 500 or the US total stock market index, and only then include NASDAQ-100 or Fang+ based products in their satellite portfolios.