Beyond tech: CMC Markets on where traders will focus next
By BRANDVOICE
Big tech’s reign over markets is fading – so what’s next? Sakis Paratsoukidis of CMC Markets says traders may do well to turn their attention to less-hyped sectors.
BRANDVOICE – SPECIAL FEATURE
Companies other than global tech firms are powering market returns for the first time in more than two years.
In late January, hundreds of billions of dollars were wiped off big tech stocks when Chinese start-up DeepSeek launched its free AI assistant. Nvidia shares booked their biggest single-day loss of 17%, and Google and Microsoft were caught in the downdraught.
In this dramatic shift for equity investors, the so-called “Magnificent 7” stocks – Apple, Microsoft, Google parent Alphabet, Amazon.com, Nvidia, Meta Platforms and Tesla – lagged the index.
Investors expecting such firms to again drive markets over the next six to 12 months are likely to be disappointed, says CMC Markets’ Head of Dealing-ANZ Sakis Paratsoukidis.
“Against the backdrop of the significant double-digit gains of 2023-2024, gains of that level are going to be hard to come by,” he says.
“The next push higher, I think, will come from the small-cap and value end of town.”
Sakis Paratsoukidis.
Though Nvidia retraced some of its losses in the following weeks, shares in the dominant AI chipmaker remained under pressure even after reporting a quarterly record of US$39.3 billion – up 78%. The strong revenue news was tempered by management’s outlook for tighter margins in the first quarter as it rolled out its new Blackwell AI chips.
Paratsoukidis says Nvidia “shot it out of the park on many metrics, but the market still sold off. Which to me says the market is priced for perfection. “
“Though companies are still delivering, investor sentiment is starting to get drawn out of the tech sector, particularly from an absolute valuation point of view.”
DeepSeek’s entry into the space has “thrown down the gauntlet” to ChatGPT’s OpenAI. Still, he regards the extreme market response as a knee-jerk reaction and takes comfort in Nvidia’s cashflow generation.
Tariffs, debt and gold
Discussing the biggest themes impacting the outlook for markets, Paratsoukidis says US President Donald Trump’s ongoing announcements on trade are the biggest uncertainty after the enacted tariffs of between 10% and 25% on imports from China, Canada and Mexico.
Other major themes are the trajectory of interest rates and expectations for elevated inflation, along with record-high consumer debt in the US.
Given widespread economic uncertainty, the appeal of physical gold as an investable asset is also flashing on his radar. Paratsoukidis says gold is increasingly regarded as a strategic asset, as reflected by rising levels of central bank buying in recent years.
“We have a situation where more people in the US on COMEX [the world’s largest gold exchange] are holding onto their futures for delivery instead of rolling them over.”
Get defensive
Paratsoukidis believes the market will increasingly favour stock pickers over those chasing investment themes or broader market moves. He noted that lower-volatility sectors such as healthcare and consumer staples are worth monitoring in the current market environment.
“They’re not going to shoot the lights out. But when it comes to a portfolio shift on a valuation basis, when consumer staples and healthcare are trading at a discount to the broader market, there could be an uplift in returns.”
While attention has been at the “Big End of Town”, there has been a quiet shift in the relative performance of companies at the smaller end of the index.
“We’re coming from a point where earnings over the last two years have been led by the Mag 7 and other large-caps, and small-caps have been suffering,” Paratsoukidis says, pointing to the third quarter of 2024 as the lowest point.
“The next push higher, I think, will come from the small-cap and value end of town. But they need a catalyst to push it through. We’ll see that once small-cap earnings come out in the next few quarters.”
What’s up with the banks?
On the local market, Paratsoukidis says that company revenues slightly missed expectations during February’s half-yearly reporting season, while earnings were marginally ahead.
Banks delivered some of the most significant surprises. The persistent strength of Australia’s big bank stocks had long defied expectations of a downturn. However, weaker net interest margins and rising costs are among the pressures that are now becoming increasingly apparent.
Falling financial sector stocks, led by a double-digit Commonwealth Bank of Australia tumble, took its toll on the overall market after some bank results disappointed.
Many analysts considered Australia’s biggest bank as the world’s most expensive ahead of earnings season when CBA stock traded at more than $165 after surging more than 40% in 12 months. While CBA’s result was slightly ahead of expectations, the stock sold off by almost 10% in the week after it reported, as weaker results at Westpac and National Australia Bank spurred many investors to finally take profits from the sector.
“The market is about 20% above the long-term average on a price-to-earnings basis. And given financials are such a big part of that, the hiccup with CBA reverberated throughout the sector and drove the whole market down,” says Paratsoukidis.
Stocks to watch
In the ASX’s next biggest sector, resources, Paratsoukidis says that BHP and Rio Tinto have delivered solid results in their recent earnings.
“They’ve been hampered by global uncertainty as opposed to what’s happening locally. But given the way they’ve traded relative to the market, I find it comforting to see the levels they’re trading at currently,” he says.
Expanding on his earlier sector picks, Paratsoukidis expects Coles to continue grinding higher in consumer staples.
“Coles is solid and can keep running the momentum, and at Woolworths, you need to keep an eye on how its cost-cutting is going and whether that translates into margin expansion,” he says.
Other local large caps from the insurance and telecommunications sectors, Suncorp and Telstra, also stand out for Paratsoukidis.
“With solid cashflows and earnings, they’re not as stretched as the broader market. They’re not glamorous companies, but they’re a decent prospect for investors.”
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