The Nasdaq index closed in correction territory on Tuesday after posting a third day of sharp losses, leaving investors mulling whether popular tech stocks have lost their shine and value names could stage a comeback.
Tuesday saw the worst sell-off for US technology stocks since March with Tesla dropping 21%, wiping more than $82bn (£63bn) from its market capitalisation. Similarly, Apple fell 6.7% and Microsoft shed 5.4%.
These stocks had rebounded in early trading on Wednesday, seemingly ending the three-day losing streak, but the episode has left investors wondering whether the tech rally is finally running out of steam.
Which funds have the highest exposure to tech?
Portfolio Adviser asked Morningstar which funds had the highest exposure to the affected companies. Its data showed 10 of the 20 UK-domiciled investment vehicles that hold Tesla shares are Baillie Gifford products.
The biggest holder is the Scottish Mortgage Investment Trust which at the end of July had 13.4% of its portfolio exposed to the electric car maker.
Last week, prior to the sell-off, Scottish Mortgage was forced to cut its stake in Tesla to less than 5% after its soaring share price meant Baillie Gifford was at risk of breaching concentration guidelines. But portfolio manager James Anderson said he remained committed to the company and foresees being significant shareholders for many years ahead.
Two Baillie Gifford Oeics are the next biggest holders, with the US Growth and Positive Change funds, having a 9.8% and 9.5% weighting respectively.
The data also showed which funds are most exposed to Apple and Microsoft which were also badly bruised during the sell-off.
The Oeic with the largest portfolio exposure to Apple is the Janus Henderson Global Technology Leaders fund with a 10.1% weighting, followed by the UBS US Growth fund at 8.1% and Axa Framlington Global Technology at 7.9%.
Regarding Microsoft, the three Oeics with the largest exposure are the Morgan Stanley Global Brands fund (9.5%) followed by the UBS US Growth fund and the SVM World Equity fund, both with a 9.4% weighting in the portfolio.
Two investment trusts have a larger percentage of their portfolio exposed to Microsoft: the Manchester and London Investment Trust, with a 15.5% weighting, and the Polar Capital Technology Trust with a 10.2% exposure.
Short-term blip or longer term shift in momentum?
The speed with which the sell-off occurred has called into question whether the downturn is a short-term blip or a longer term shift in the momentum of growth stocks.
Morningstar Investment Management Europe head of multi-asset portfolio management Mike Coop says the sell-off is unsurprising given the spectacular run up in the share prices of the stocks beforehand.
“In our view US equity market valuation levels remain so high that a big fall in share prices is more likely than usual, eventually,” he says. “In the meantime, share prices continue to be supported by investors chasing returns and cheap money.”
Tech is more than just the Faangs
8AM Focussed fund manager Andy Merricks says it’s hard to see the sell-off as anything other than a blip. He argues tech is so much more than simply the Faangs that get all the attention, although the sector’s direction is led by what happens to them.
“So is it likely that sectors such as cyber security, AI, robotics, cloud and healthcare innovation have peaked or are in decline? I can’t see it. Are sectors such as banking and oil and gas in decline? Probably.
“If they are not in decline, and as I suspect have many years to run yet, then every time there is a 20% correction means that these good ideas are available 20% cheaper than they were last week. This is why I expect new highs to be tested by all of these sectors in the coming weeks and months.”
A chance to top-up on tech
Canaccord Genuity Wealth Management chief investment officer Michel Perera says the IT correction is mostly technical and amounts to investors selling what has done best this year, rather than unwinding core positions.
“Nasdaq had reached extreme territory in many technical aspects and the tech sector, in particular the top six constituents of the S&P 500, need to get back closer to the 200-day moving average, which is probably another 10% down from here.”
Perera does not see the long-term trend changing, meaning the correction could be a good opportunity for some investors to top up their tech exposure and the disclosure of Softbank as a potential Nasdaq “whale” means that this correction definitely has another leg.
A chance for value to come back?
But is the blip a sign that value stocks are fighting back against tech and growth?
Perera says investors should not forget the upcoming US election and the risk of no clear winner emerging the day after, which would trigger massive volatility and once again hit the sectors that have done best this year.
“Fundamentally, though, as long as long-term yields don’t soar and make value the flavour of the day, the technology sector is answering so many of our current needs that it will recover even with stretched valuations.”
Merricks notes that value outperformed growth significantly for 33 years between 1975 and 2008 but growth has been outperforming value for the past 12 years.
“Has it got longer to go? I’d say, certainly. Will value have short-term periods of superiority? Again, certainly.
“Being a Crystal Palace fan is a bit like being a value investor. We may occasionally beat Manchester City or Liverpool, but will we ever be challenging them for the title? Not unless the world changes significantly and the money in football disappears. Much like tech really.”
