Salman Ahmed, chief investment strategist at Lombard Odier Investment Managers, says: “Fears of wider regulations, for example tax treatment of e-commerce, and the contagion effect within the whole sector – and, by extension, the market – are noteworthy.”
Recently, the Bank of America Merrill Lynch (BoAML) Global Research report cautioned investors to reduce tech allocations in 2018, citing regulation as one of the reasons.
The report argued that the economic and social disruption of technology is unlikely to stop and the sector’s “growth, power and visibility” making it extremely vulnerable to increased regulation and taxation, “most especially if recession wrecks government finances”.
BoAML’s report outlined 10 strong reasons why global investors should reduce their tech exposure, alluding to the negative impact of regulation on the tobacco and biotech sectors over the years (see chart below).
However, while BoAML takes a bearish view on the sector, some investment managers remain bullish, arguing technology goes beyond just the Faang (Facebook, Apple, Amazon, Netflix and Google) stocks.
Tarred with the same brush
Opposing the idea of grouping the Faangs together, Architas investment director Adrian Lowcock argues that people often focus on the few stocks within a sector, rather than the many.
Throughout 2017, Faang stocks were cited as the catalyst for the US S&P 500’s strong performance, but Lowcock argues that technology is now a much broader asset class and includes blue sky companies to utility businesses and industrial type technology companies.
He explains that although Faang stocks have taken a hit, not all tech companies had stratospheric valuations and the “technology story is still very solid”.
“I find it odd that the Faangs are grouped together as I do not see Apple for example as a comparison to Facebook and even less to Netflix,” he says.
“This is the issue with technology; it is very easy to tar companies with the same brush but the fact is that the industry is incredibly diverse and not all tech is expensive, some businesses are better managed than others.
“Growth in the sector is still way above other industries and the pace of innovation and technology’s ability to disrupt established markets hasn’t gone away overnight.”
Likewise, Didier Saint-Georges, managing director at Carmignac, says this sell-off is unlikely to undercut the value of web technology – from the standpoint of users and advertisers alike.
“Furthermore, the whole tech sector is getting lumped together with Facebook and Amazon, although many of its smaller firms in fact have very different business models,” he adds.
“This means that every correction to tech stock prices is likely to offer long-term buy opportunities to those investors who carry out in-depth analyses of those firms’ powerful, yet diversified business models.”
Wobbles are not a bubble
Lowcock argues that while it is common for investors to get caught up in a market trend, this is not a bubble.
He explains that usually during a bubble the markets follow a cycle and investors become excited about one trend or theme. They rush into the sector, driving up valuations, only for the bubble to deflate.
However, he says: “This time around it wasn’t the technology sector as a whole, it was certain areas and certain stocks – AI and robotics funds and the Faang stocks where the story perhaps got ahead of the reality.”
Agreeing, Ahmed says that the “current wobbles”, which may continue, do not pose any macro threat.
He said this is because “the nature of different tech businesses varies widely and any regulatory shifts – which are still uncertain in terms of scope and timing – are likely to focus on individual companies”.
Stephen Yiu, chief investment officer and manager of the LF Blue Whale Growth fund, says the sell-off is a time for investors to tap in to the market.
The tech sector has been deemed as one which has the highest growth potential, thus naturally valuations are logically more sensitive to changes, he explains.
However, he adds: “Over the long run, because tech is the only sector that can achieve meaningful sustained growth in revenue and earnings over the next five years, it remains the most attractive for finding companies which can materially outperform the market.
“Indiscriminate sell-offs can present golden opportunities to invest in some of these companies at attractive valuations.”