The so-called Magnificent 7 tech stocks are at the highest risk of disruption over the coming years, while small caps offer an “unprecedented” opportunity for investors, says Cathie Wood, of ARK Invest.
Imagine being at the forefront of the next technological revolution, with opportunities for returns that could redefine your investment portfolio.
A wave of innovation is washing over the global economy right now.
It’s faster, bigger, and stronger than at any other point in history.
And with many disruptive tech stocks currently being deeply mispriced due to prevailing market conditions, early investors are being presented with a unique opportunity for outsized returns in the long run.
Top-down research with bottom-up analysis is vital if investors are to capitalise meaningfully on this next wave of innovation.
The AI catalyst
Periods of intense technological advancement are not new. Present day aside, the best example probably came at the turn of the 20th Century.
About 120 years ago, we saw the dawn of the internal combustion engine, the telephone and electricity, all hitting critical inflection points at the same time.
Today, like then, multiple innovation platforms are emerging at the same time. The most disruptive we believe are AI, robotics, energy storage, public blockchain and multiomic sequencing.
All five are revolutionary enough to spur a capital markets cycle on their own. What’s making this wave all the more powerful, however, is how these platforms are converging.
Unprecedented impact
At the heart of it all is the rapid advancement of AI.
It’s directly accelerating the development of the technologies underpinning each platform in a direct and measurable way.
For example, machine learning is quickly increasing the safety of autonomous cars in complex road environments. Advanced AI modelling is helping to develop drugs much more efficiently and effectively.
Technologies previously slated for commercialisation well into the 2030s are now on track to be rolled out by the end of this decade.
The economic impact of these five innovation platforms hitting the global economy in concert is going to be unprecedented, to say the least.
Address market inefficiencies
The investment opportunity here is being furthered by innovation’s heavy discount in the market right now.
As it stands, our own Innovation ETF is trading at a price to book ratio lower than the S&P 500 [at time of writing, June 2024]. This presents the potential for a sharp, positive re-rate.
There are two primary reasons for this discount we can see.
One is the massive overuse of market-cap weighted benchmarks such as the S&P 500 in the markets today.
Investors may think that passively investing in a standard equity benchmark is giving them exposure to disruptive technologies – after all, 500 is a lot of stocks. However, thanks to over-concentration, what they’re really doing is doubling down on technology behemoths being rewarded for their past successes.
The top ten stocks in the S&P 500, for example, are at their highest concentration in more than three decades. And the so-called “Magnificent 7” tech names this encompasses are, in our view, the incumbents at the highest risk of disruption over the coming years.
Therefore, investors must look further down the market cap scale for the greatest innovation opportunities.
The second reason for today’s discount is market short-termism.
Many of the most promising innovation stocks we’ve identified are investing in growth. It’s absolutely necessary. It also means they need a time horizon of at least five years for their value to accrue.
As such, they have been particularly penalised in a market where rapidly rising interest rates have made investors more sensitive around long duration assets than normal.
As interest rates fall back down, this headwind will rapidly evolve into a tailwind.
Early exposure
Today’s wave of innovation might well prove to be a once-in-a-generation investment opportunity. Yet it’s being overlooked—penalised, even—by the least discerning equity market investors.
The solution lies in thinking outside the box. History has shown that the greatest returns are achieved by taking contrarian positions and being right.
By allocating to an innovation-focused investment strategy that combines macro analysis with deep, fundamental research across the entire market cap spectrum, you can maximise your chances of success.
As a bonus, because innovation is currently mispriced in the market, you can seize this opportunity at a significant discount. However, this window won’t be open forever.
*Cathie Wood is CEO of ARK Invest
