The extreme concentration of performance on technology and artificial intelligence is keeping markets in the grip of a few dominant stocks. For Nicolas Bickel, the allocation challenges are now focused on the quality of growth, the sustainability of earnings and the diversification of sources of return, at a time when the macroeconomic environment is becoming increasingly complex.
To what extent can we envisage a broader rotation of assets and regions today, when technology stocks and the AI theme still occupy an ultra-dominant position?
The sector rotations that the market has been anticipating since the 2023 rebound have never really lasted. The flows are systematically returning to the major players in technology and artificial intelligence. Even today, an extremely large proportion of market performance is still concentrated in a handful of stocks.
But we have to recognise that this dominance is also based on very solid fundamentals. We're talking about companies that are generating exceptional earnings growth. The market is not buying promises. They are buying real revenues and cash flows.
The real question now is how sustainable this growth is. A large part of current profits comes from the gigantic investment cycle in AI-related infrastructures and data centres. At some point, the productivity gains promised by artificial intelligence will have to spread throughout the economy and benefit other sectors. This is probably what will enable a more sustainable expansion of the market.
The other scenario would be a questioning of the sector's ability to maintain this pace of growth and these exceptional margins. Any technological revolution ends up either creating a few ultra-dominant players, or triggering strong competition on margins when products become comparable. This is a key issue today.
How is Edmond de Rothschild currently adapting its asset allocation to an environment marked by geopolitical tensions, fragmented world trade and less clear monetary policies?
We work around three pillars. The first is long-term strategic allocation. We start from the premise that the world is entering a different regime, with more structural inflation, sustainably higher interest rates, the relocation of production close to consumers and less predictable monetary policies.
Based on this new data, we build robust and resilient portfolios that can withstand different economic regimes. We simulate our allocations in inflationary, recessionary and deflationary scenarios to achieve the most robust factor diversification possible.
The second pillar is tactical. We adapt portfolios to geopolitical events or short-term market movements. Historically, conflicts have rarely had a lasting impact on financial markets. Corrections are often violent but relatively brief. This does not mean that we should ignore risks, but rather avoid constructing portfolios dictated solely by the fears of the moment.
Finally, the third pillar concerns practical implementation. These are the sectors, factors and investment themes that we choose to avoid overexposure to the same performance drivers.
How can we optimise diversification in portfolios with markets that now seem to be taking on board the idea of more structural inflation and permanently higher geopolitical risk premiums?
The main challenge today is clearly the rise in correlations between assets. For a long time, investors lived in an environment where bonds naturally acted as a shock absorber when equities corrected. This mechanism can become much less effective in an inflationary regime.
If inflation remains high, central banks may be forced to maintain high interest rates even as growth slows. In such an environment, equities and bonds may correct simultaneously, as in 2022.
Diversification therefore needs to be thought through differently. In particular, we favour exposure to the dollar, which retains its role as a safe haven in times of stress. Gold also remains a highly relevant asset in a context of structural inflation and geopolitical tensions.
We also believe strongly in private markets for investors with a long time horizon and few liquidity constraints. The unlisted universe offers much broader sectoral and economic diversification than listed markets, with lower correlations to traditional cycles.
After the spectacular rebound in equity markets since 2023, where do you see the most attractive segments today in terms of risk/return trade-offs?
It all depends, of course, on the investment horizon. Over the long term, we find the healthcare sector particularly attractive. Valuations have become attractive after several difficult years, even though the potential for innovation remains significant.
In the shorter term, we also believe that certain luxury and consumer goods segments offer an attractive risk/return profile, particularly if geopolitical tensions in the Middle East ease and trade flows normalise.
We also remain exposed to the entire ecosystem linked to artificial intelligence, but more through the 'shovels and picks' of this technological revolution. In addition to semiconductors, these include electrical infrastructure, transport, industrial materials and suppliers of the equipment needed to build data centres. They will all be called upon to make major contributions over the next few years.
What does the valuation of SpaceX at nearly 1,800 billion dollars inspire in you?
SpaceX is a fascinating case because you don't just buy a company. You get caught up in a story, a vision. At these valuations, investors are buying more into Elon Musk's dream than into the group's current revenues.
It's important to take orders of magnitude into account. Today, SpaceX is trading at close to 100 times its revenues. During the dot-com bubble, some technology IPOs paid around 30 times revenues, and Amazon's IPO was trading at 3 times sales. So we're at extremely high levels.
The same logic applies to Tesla. The stock is still trading at around 14 times revenues, while a traditional carmaker like Renault is trading at around 0.1 times sales. This shows the extent to which the markets are prepared to pay for major technological breakthroughs.
The reality is that today, the only SpaceX activity that really generates revenues is Starlink. Everything else is still largely based on extremely ambitious projections relating to the conquest of space, orbital infrastructures, artificial intelligence and the future exploitation of new industrial capacities in space. Our approach is very similar to that of venture capital, but applied to companies whose valuations are already reaching gigantic levels.
In a world that has become more volatile and less predictable, what do you think are the key allocation choices that a long-term investor can no longer ignore?
In our view, the first principle is to remain invested. Many investors are still holding too much cash for fear of the next crisis. Historically, trying to anticipate corrections and 'time' the market has often proved more damaging than accepting volatility and staying invested over the long term.
Over a very long period, equity markets remain the assets that offer the greatest potential for value creation. Corrections do occur, but today they are often shorter and monetary responses quicker than in the past.
We therefore continue to favour equities for the long term, with a more balanced approach across geographical regions. The United States remains extremely powerful in terms of innovation and profit generation, but there are also opportunities to rebound in Europe and in certain emerging markets linked to the major industrial and energy cycles.
Finally, we believe that it is becoming essential to include more real assets and private markets in long-term asset allocations.