The distinctive popping sound in the market? It’s the micro-bubbles bursting around us.
As stocks like Nvidia soar to new heights, concerns of a tech bubble loom. However, it’s the micro-bubbles, those pockets of excess within hyped market areas, that pose a greater threat to investors, as noted by Citi.
A Three-Pronged Approach
To navigate through the hype and potential bubbles, Citi proposes a strategic three-step plan. This approach includes honing in on growth stocks trading at reasonable prices, utilizing the growth at a reasonable price (GARP) strategy, leveraging operational efficiency, and focusing on sales growth.
Citi emphasizes that by following this approach, investors can steer clear of the hype surrounding specific structural themes that are susceptible to aggressive unwinding.
Diverging Views on Bubble Risks
While market chatter abounds with talk of bubbles, drawing parallels to the infamous tech bubble of the late 1990s, Citi offers a different perspective. The bank refrains from aligning with those who foresee a replication of the dot-com era, where the Nasdaq plummeted by over three-quarters from its peak.
According to Citi, the current risk of bubbles in equity markets differs significantly. Instead of a broad market trend, the firm sees it as a series of micro issues within specific themes—a continuation of the ongoing cycle of micro bubbles since 2020.
Identified Bubbles
Among the bubbles pinpointed by Citi are special-purpose acquisition companies (SPACs), entities that thrived amid the Covid era, and unprofitable clean energy stocks. These assets are seen as part of the ongoing surge in micro-bubbles within the market landscape.
Federal Reserve Tightens to Combat Inflation Surge
Federal Reserve officials have taken substantial steps to combat soaring inflation by increasing their benchmark federal-funds rate target by 5.25 percentage points since March 2022. The new target range stands at 5.25%-5.50%, aiming to mitigate the worst inflation seen in over 40 years.
Micro Bubbles Bursting
According to Citi, the recent surge in interest rates has played a pivotal role in puncturing several micro bubbles that have been bubbling underneath the surface of the U.S. markets since 2020. Despite this, the risk of additional bursts remains prevalent today. The note highlighted that the micro bubble risk poses a significant threat to investors engaging in popular themes.
Popular Investment Themes
Artificial intelligence (AI) has emerged as one of the hottest investment themes over the past year and continues to hold a prominent position in Citi’s top themes list. While growth-oriented themes, including AI, have witnessed certain stocks facing repercussions for failing to meet high expectations, notable stock picks in this space from Citi include Amazon.com, Alphabet, and Meta Platforms.
Diverse Investment Opportunities
In addition to AI, Citi has expressed bullish sentiments towards the infrastructure and fossil fuel sector, endorsing stocks like Aecom, Edison International, Chart Industries, Martin Marietta Materials, NOV, and United Airlines. The bank’s top themes list encompasses a wide array of sectors, such as digital leisure, experiential commerce, fintech, and internet-driven businesses.
Seeking Stock Selection Amidst Market Fluctuations
Despite facing challenges posed by narrow market leadership and varying earnings outcomes, Citi believes that there still exist opportunities for astute stock selection. Emphasizing a focus on theme- and stock-selection methodology anchored on operating leverage combined with growth at a reasonable price and top-line visibility overlays.
