Mega Caps and Big Tech: Safe haven in the banking turmoil? Mega Caps and Big Tech: Safe haven in the banking turmoil? Mega Caps and Big Tech: Safe haven in the banking turmoil?

Mega Caps and Big Tech: Safe haven in the banking turmoil?

Equities 4 minutes to read
Charu Chanana

Head of FX Strategy

Summary:  Large cap stocks, especially in tech, have seen big gains in the last few weeks primarily due to the slide in Treasury yields and flight to safety amid the banking sector woes where companies that are less dependent on financing needs become attractive. How long that outperformance can continue is a question, given that tech stocks are not immune to a growth slowdown. But more importantly, small cap stocks will likely continue to be under pressure if bank lending standards tighten and a recession becomes imminent.


Yields and cautious positioning helping equities

The first quarter of 2023 has been quite a turn from last year. The S&P 500 ended 2022 down close to 20% but is up 3% YTD while the NASDAQ100 ended 2022 with declines of over 30% but is now up 17% YTD. This may be unexpected as the macro situation looks far more vulnerable, with 2022 seeing inflation risks remaining top of mind, but the banking sector troubles have added to that recently and raised the risks of a credit crunch leading into a recession.

Part of the reason for the sustained stability in equities has been the slide in Treasury yields as Fed rate hike bets have been pared quickly. But this is potentially a sign of short-sightedness, where investors are focused on a dovish turn in Fed policy but still not ready to price in the threat of a recession that could take the equity risk premiums higher even as lower interest rates help to improve the valuations.

Another key reason has been positioning, where many investors had scaled back their exposures last year and in the run upto the collapse of SVB earlier in March. This lowered the rate of exodus from the markets as the new crisis hit. Meanwhile, sentiment has been supported so far with the regulators announcing quick measures even as uncertainties linger and risks of further fallouts in the financial sector remain.

Tech outperformance vs. small caps

A more micro trend evident YTD has been the outperformance of the large growth stocks, and that is also what is driving key indices higher YTD. Market breadth is reducing as large-cap stocks outperform and drive broader indices higher, but beneath the surface, a larger number of mid-to-small cap stocks continue to decline. Apple and Microsoft have climbed 23% and 17% respectively YTD. Google parent Alphabet is up 20% as well, while Meta is up 71% after a decline of 64% in 2022.

The reason for tech outperformance once again partially comes from lower yields, as these companies are usually more interest rate sensitive and scaling back of Fed rate hike bets has been boon to the high-growth tech sector. The companies have also been leading cost management, with massive layoffs being announced since late last year, and may be able to deliver better-than-expected earnings for the first quarter.

Nasdaq100 vs. Russell 2000 (Normalized on March 1, 2023) Source: Bloomberg, Saxo

Meanwhile, small cap stocks are being disproportionately hit by concerns that problems in the banking sector would lead to a credit crunch, making it harder to borrow money from banks and operate their business models. In contrast, the megacap companies are generally less reliant on credit financing given the large amounts of cash on their balance sheets. So the flight to quality in terms of the emanating credit risks has brought the large cap tech stocks in favour. Risks of bankruptcies is likely to go up if bank lending standards are tightened, and that could mean continued pressure on small caps.

Being nimble

There may be some room to run for this outperformance of tech stocks, especially if you think the Fed could start to signal rate cuts. However, the tech sector is not immune to a growth slowdown. Even if these companies manage to report a strong Q1 earnings, the outlook could take a turn for the worse in light of the increasing recession risks. Not to forget, most of these large tech companies are still over-staffed after massive hiring sprees during the pandemic.

Investors should also be nimble to assess their portfolios, given the outperformance in large caps could alter their desired asset allocation. Say if a cautious investor wanted to maintain an overweight to value stocks vs. growth stocks. The major rally in growth stocks may have shifted the allocation to be in favour of growth, and portfolio allocation therefore may need to be revisited.

Global Growth vs. Value Return (Normalized as on Jan 1, 2023) Source: Bloomberg, Saxo

Long-term investors also need to keep an eye out on the tangible vs. intangible trend, given that the global supply-side vulnerabilities have still not been resolved and that will continue to emphasise a need for productive investments in the next few years.

Saxo's Megacap Equity Theme Basket. Source: Saxo

Disclaimer

The Saxo Group entities each provide execution-only service, and access to analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Inspiration Disclaimer and (v) Notices applying to Trade Inspiration, Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular, no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/en-sg/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo Markets does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo Markets or its affiliates.

Saxo Markets
88 Market Street
CapitaSpring #31-01
Singapore 048948

Contact Saxo

Select region

Singapore
Singapore

Saxo Capital Markets Pte Ltd ('Saxo Markets') is a company authorised and regulated by the Monetary Authority of Singapore (MAS) [Co. Reg. No.: 200601141M ] and is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Risk Warning to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as Margin FX products may result in your losses exceeding your initial deposits. Saxo Markets does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Markets does not take into account an individual’s needs, objectives or financial situation.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-sg/about-us/awards.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website are not intended for residents of the United States, Malaysia and Japan. Please click here to view our full disclaimer.

This advertisement has not been reviewed by the Monetary Authority of Singapore.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.