Citigroup.com Homepage
CIO Strategy BulletinArticle22 Jun 2024

Pleasure and Perils of Concentrated Portfolios

CIO Strategy Bulletin

Can a technological innovation be profound, “unstoppable,” and also overpriced by investors? History is unequivocal: it can. Yet that single observation is the mere starting point for a very difficult set of questions for investors with their long-term portfolio success in the balance.

Key Takeaways

  • Mid-year market turbulence: With scattered signs of economic softening and rising global political risk at mid-year, interest rates have fallen and most equity markets have stalled in the past month. We’ve routinely cautioned of the pattern of mid-year equity market weakness and bond market strength (please see our June 8th CIO Bulletin). In contrast, markets view large cap tech as impervious to slowing, a view that wasn’t prevalent as recently as 2022.
  • AI will be transformative, but what’s already priced in? Artificial Intelligence (AI) breakthroughs are a technological development that hint at a faster trend rate of economic growth and an economy that, in time, may be unrecognizable from the present. For equities, the impact is most reminiscent to the late 1990s internet boom. Let’s recall, however, that top-10 market cap companies of the 1999 included IBM, Intel, Cisco Systems, Lucent and GE, firms that all eventually suffered very deep share price declines.
  • Surprise! Elections are unpredictable. A populist swing in European parliamentary elections, heavy protest votes in India and cemented-left leadership wins in Mexico were all surprises for markets this year. This should remind us of the often-futile efforts to align investments to election poll results. This This is ahead of looming contests in the UK, France and the US in coming weeks and months.

Potential Portfolio Implications

  • Past performance is no guarantee of the future. However, the past shows most firms that have grown to be the market’s largest by market cap have routinely underperformed when measured five years later.
  • We continue to see US large cap tech EPS moderating to a still-robust pace near +25% in 2024, down from +43% in 2023. The world’s most valuable semiconductor designer is “sold out” on AI strength through at least 2025. We continue to view semiconductor equipment producers as our favored potential narrow market opportunity. Conversely, AI investment spending by service providers might not deliver results fast enough for markets (i.e. recall investment spending on the “Metaverse?”)
  • Timing an investment in strong innovators with surging share prices is particularly hard. Investors can overpay for any investment, even those with positive fundamentals. We believe investors have to balance continued exposure to highly valued, growing market leaders with management of concentration risk.

Want more insights?

Subscribe

Sign up to receive our newsletter providing a roundup of recent content and updates on new reports.

Sign up to receive the latest news from Citi.