[PB Notebook] US Stock Investment, Expand the Net of Growth Stocks

Jaehyun Kim, Senior Specialist, WM Star Advisory Group, KB Kookmin Bank

Last year, the leading topic in the stock market was undoubtedly artificial intelligence (AI). In particular, the market was driven by the so-called 'Magnificent 7 (M7),' a group of seven large-cap technology growth stocks. The members of M7 include Nvidia, Microsoft, Alphabet, Amazon, Apple, Meta, and Tesla, all closely related to AI. Thanks to their strong performance, the US Nasdaq index rose by 43.4% over the course of last year alone.

Even this year, some AI-related stocks continue to hit new all-time highs day after day. Despite the US Federal Open Market Committee (FOMC) holding the benchmark interest rate steady for four consecutive meetings and the recent retreat of expectations for an early rate cut, the US stock market is recording a strong rally centered on these growth stocks.

Recently, there are even signs of a kind of fear that if investors fail to buy these growth stocks, they might be excluded from this rally. This is a reemergence of the so-called 'FOMO syndrome (Fear of Missing Out),' which appeared during the asset market expansion following the COVID-19 pandemic.

However, it is important not to forget that this is still a period of high volatility. The divergence between the US Federal Reserve (Fed) and the market regarding the timing of the first rate cut could act as a factor increasing market volatility. The current strong rally seems largely driven by the market’s anticipation of rate cuts being priced in ahead of time.

Given the short-term overheating of the stock market, additional purchases of US stocks may be burdensome and should be approached with caution. Of course, for investors who already hold stocks, a strategy of holding rather than selling for the time being to maximize profits is also reasonable.

Going a step further, it is now necessary to broaden the net within growth stocks. This means diversifying portfolios within growth stocks whose industrial applications are expanding. Attention should be turned to sectors that have been overlooked or whose prices have risen less, even though they are growth stocks.

In this regard, it is recommended to focus on sectors within AI that are expected to see expanded growth in the future, such as electric and electronics (smartphones, PCs, home appliances, etc.), autonomous driving, finance, security, metaverse, and healthcare. Especially, it is important to diversify investments into 'Low Beta' stocks?those with excellent cash flow and return on equity (ROE) and less sensitivity to market volatility.

For individual stocks with high valuations, managing volatility is essential. Global semiconductor exchange-traded funds (ETFs) or global growth mutual funds with well-diversified holdings can be alternatives. This is because they can help avoid the maximum downside of individual stocks when volatility increases.

The purpose of investing is to generate returns relative to volatility. A significant price increase means higher risk. In this context, falling into the 'persistence bias' that large technology stocks will continue to rise is problematic. Building a stable portfolio over the long term is the only way to endure a long life without fatigue. Above all, maintaining a humble attitude before the market is crucial.

This content was produced with the assistance of AI translation services.