Soaring technology stocks run the risk of rallying too far, according to the manager of an outperforming equity fund that’s betting on stable international firms with strong profit growth.
(Bloomberg) — Soaring technology stocks run the risk of rallying too far, according to the manager of an outperforming equity fund that’s betting on stable international firms with strong profit growth.
Investors should be selective in a sector that could look “very expensive” as slowdown risks rise and central banks stay committed to interest rate increases, said Nicole Kornitzer, the Paris-based portfolio manager of the Buffalo International Fund at Kornitzer Capital Management Inc. “As valuations get richer, we would look to trim,” she said.
Kornitzer, whose fund invests in non-US stocks and oversees about $600 million, recommends companies that can “survive” a downturn, including global enterprise software maker SAP SE, design program firm Dassault Systemes SE and measurement technology company Hexagon AB. She also sees opportunities in health-care firms given the sector’s resilience to economic cycles.
Technology shares have rallied this year, partly aided by expectations for a pause in interest rate hikes in Europe and the US following turmoil in the banking sectors of both regions. The Nasdaq 100 entered a bull market at the end of March and European tech stocks are among the best-performing sectors of 2023 in the region. The gains left the Stoxx Europe 600 Technology Index trading at 24 times forward earnings, above the historical average of 19.4 times.
“We’re still cautious and there still is probably a recession coming,” said Kornitzer, adding that a downturn may be hastened by a banking crisis that has seen the collapse of several US regional lenders and the UBS Group AG takeover of Credit Suisse Group AG. “Either that, or inflation continues to be strong and the Fed and the European Central Bank have to continue hiking. It’s not smooth sailing in the future.”
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The $611 million Buffalo International Fund has returned about 13% so far this year, outperforming 88% of peers according to data compiled by Bloomberg. The benchmark FTSE All-World ex US Index is up about 6% over the same period. The fund holds 70-90 positions in companies that are headquartered in countries outside the US across various market capitalizations.
In terms of other opportunities, the fund manager says health-care stocks — the fund’s largest exposure followed by information technology, industrials and financials — are selectively attractive. “There are still a lot of places to hide in health care when there’s a downturn because health-care spending tends to be pretty resilient to economic cycles,” she said. AstraZeneca Plc, Roche Holding AG and Merck KGaA are among the fund’s holdings in the sector.
Kornitzer also said the fund prefers luxury conglomerates such as LVMH and Kering SA even if they’re not cheap as they have a portfolio full of brands, they capture the consumer in many different ways and they can cut costs dramatically in the event of a downturn.
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