Deepak Puri, Chief Investment Officer, Deutsche Bank Private Bank, speaks with Quartz in the latest installment of the “Smart Investing” video series.
Watch the interview above and check out the transcript below. This transcript of the conversation has been lightly edited for length and clarity.
Andy Mills (AM): Does the soaring price of Nvidia stock mean we are in an AI bubble?
DP: Well, that’s a great way to start a conversation. I wouldn’t call it a bubble, but it’s definitely gained momentum over the last 12 to 15 months. I think AI is a secular topic and its impact on productivity is gaining market attention. So there’s a lot of money flying around. There’s a lot of liquidity in the market, and a lot of it is finding a home in these unrealistic themes, whether it’s AI on the technology side or GLP 1, obesity drugs on the healthcare side. However, the market is starting to differentiate between some of the underlying stocks that make up the Mag 7. You mentioned NVIDIA, and I think if you look at the fourth quarter revenue numbers, there was some site repurposing. There are some names in Mag 7 that are doing very well, but as you know, there are also some names that don’t get as much attention. Therefore, I believe that this year, 2024, will be the year of differentiation within Mag7. This means that certain names perform much better than others. And I think this year, instead of passively investing in ETFs, it also applies to active management.
morning: We need to come up with a new name for Magseven. What will happen? Should I go back to the Fab Five or Fang?
DP: It might be magnitude 4, no one knows. yes. But yes, we love acronyms. The world loves abbreviations so much that I think we need to come up with new ones.
morning: Yeah, I mean, traditional investing and consumers think, oh, whatever FANG is, it’s like branding.
DP: surely. However, I always advocate for much larger and broader market exposure rather than a specific theme, segment or industry. As you know, many of these stocks are highly correlated, so Andy, one particular driver could bring in his one big name stock, and along with that, the rest of the names. It’s from. So I think we need to diversify. What’s interesting is if you look at his EPS growth from Q4, the S&P is up 8% year over year. This is an increase in profits in the fourth quarter. Mag 7 components increased by 56%. So if you exclude Mag 7, S&P’s revenue actually fell by 2%. So what we’re saying is that there probably needs to be an expansion effect in the market, and that usually happens when you’re hitting all-time highs like we’ve experienced. So here we’re going to brighten up some of the names in the portfolio on the Mag 7 side and some of the other names, maybe the healthcare side, maybe industrial materials, commodity-driven cyclical stuff that hasn’t really done much. You can start considering some of the names. I participated in this meeting. And that would be one way to look at your stock exposure.
read more: Let’s talk about Nvidia stock and whether it’s a bubble or not.
morning: If Nvidia goes up, the market goes up, and if NVIDIA goes down, the market goes down, so it seems like we’re in a dangerous place right now as an economy or risk management mode. That may be the right thing to do, but differentiate where you buy.
DP: absolutely. And if you have never invested in this market or participated seriously before, it is better to start from a risk perspective than to get too excited about the return potential. It’s a method. Because whenever the market is at a peak like this, it’s been up 16 of the last 18 weeks. The market has just risen for the fourth month in a row. It’s not unusual for the market to have three or four declines of 5 to 7 percent. That’s a 10% adjustment. So I think we might have a better entry point into the tech sector in particular later this year, rather than just trying to catch it at its peak.
morning: We were talking about bubbles and AI bubbles. Even if you exist, we don’t know… What the hell were you…?
DP: Well, we don’t think there’s a bubble yet. One way to look at it is something called the PEG ratio is a good measure. Understood. You know, P/E ratio divided by earnings growth. If you look at the tech sector’s PEG ratio, it’s actually lower than the broader S&P’s PEG ratio. So if you think the tech sector is in a bubble, you should assume the entire S&P is in a bubble, but with a P/E ratio of 21x, I don’t think so. It’s probably a little more expensive than what we’ve seen in the last four or five years. But, you know, his P/E in the S&P is higher on average than it used to be. In those days, 15x earnings was kind of the de facto standard for making phone calls, cheap or expensive. I think this percentage has increased as the S&P component has become more digital and more technology-oriented stocks. So 18, 19 times is considered something like an average right now, and I think we’re trading at 21 times. That’s not a bad thing. The other thing is, when you look at this particular bull market, it seems like one of the things that’s different this time around compared to, say, the late 1990s is the earnings context. This price momentum and price increase is not just caused by PE expansion. There’s very strong earnings momentum behind that. So I think that’s a very different perspective from the dot-com bubble era.
morning: Thank you so much, Deepak.
DP: joy. Thank you for calling me.
