Hermes’ Rutherford warns against blind faith in tech

Investors have been warned against having blind faith in technology stocks by Hermes’ James Rutherford, who said the sector had seen “bubble-like” hysteria.

James Rutherford warns against blind faith in tech

After witnessing sharp falls in the value of some tech stocks that released disappointing short-term news, Rutherford said some people had put themselves at risk by investing in the theme of technology as a whole without examining the companies they hold.

“People seem to think the stars are all going to align but I don’t believe that,” Rutherford, co-head of European equities, said.

“It doesn’t take much to upset those growth parts.”

Technology stocks have powered the uplift in stocks, especially in the US and emerging markets.

"People are buying a theme rather than a company..."

Data from Seven Investment Management suggests the S&P 500 has closed at a record high on 25% of the trading days this year, and with the tech sector accounting for 23% of the index’s weighting it suggests the sector has powered these high returns.

Rutherford, despite describing himself as cautiously optimistic for 2018,  warned that this level of momentum in markets would not continue forever.

Owning a large portion of growth stocks in areas such as tech that are currently benefitting from market’s upswing was “dangerous”, he argued.

“There is risk there,” Rutherford said, adding: “People forget tech is a cyclical stock, there has been a lot of bubble-like hysteria.

“People are buying a theme rather than a company. Where companies do disappoint and when they have this year the stocks tend to get very, very badly punished.”

Labelling some market reaction to negative results or developments as “brutal”, Rutherford said the use of quant analysis and computers making investment decisions for passive portfolios had distorted markets.

It was the power of passive that powered 2017’s market rise, and computers cutting holdings in stocks on the back of calculations rather than human research that could lead to sharp corrections.

Lots of “little things” could nibble away at investor’s confidence in the tech sector, resulting in an eventual fall in their value, Rutherford warned.

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