Investors are being warned that recent falls in the price of several mega cap tech stocks is set to continue, as rising bond yields, commodity prices and the return of inflation favour more value-orientated companies.
Last week, the tech heavy Nasdaq 100 headed to its worst weekly loss since October as investors became concerned that surging valuations during the pandemic had gotten out of hand.
So, should investors be selling out of tech, or has the sell-off created a buying opportunity?
“Every year we get some sort of market correction that throws everyone off balance,” said Nick Wood, head of fund research at Quilter. “It certainly appears as if the market could be shifting in sentiment given the rise in bond yields and the sell-off we are seeing in tech focused names.”
Dawn of a new era?
So, having been one of the best places to hold capital over the last decade, have the large cap tech names had their day in the sun?
For Wood, the key for investors is to block out the noise and remember the reasons for investing in the first place. But he added it is still worth keeping on tech should there be a more sustained rotation to the more value orientated section of the market.
“Despite the volatility, tech remains an important part of a portfolio given the trends seen since the pandemic, but this should serve as a reminder of the importance of being diversified,” he said.
‘These stocks will never have the same tailwind like they had last year’
While some asset managers are only now considering their exposure to the US, and by proxy the large cap tech stocks, Chris Metcalfe, investment and managing director at Iboss, said they have been cutting their weighting over the course of the last five years.
Wary of how expensive many of these companies have become, they have been looking for growth opportunities in other regions, such as emerging markets.
“Where things became complicated for tech stocks last year is that the pandemic turned many of them into defensive companies, which propelled them to new highs,” he said. “Going forward, as we move away from working from home, while things won’t be like they were before these stocks will never have the same tailwind as the one they experienced last year.”
With many tech becoming classed as bond proxies, Metcalfe added that an environment in which bond yields are being re-rated rapidly will be another headwind for the sector.
“There are still good tech companies, but the bottom line is that if we starting looking at things post-pandemic, it is looking harder for many of them to grow than it was before,” he said.
Too concentrated
When looking at the value versus growth argument, Metcalfe noted that the problem is that momentum was so strong into such a small number of stocks that investors forgot there are other stocks out there.
“You don’t have to just buy all the large growth names or just the cheap value,” he said. “There are many stocks in the middle ground that have largely been ignored.
“It is very easy to think that the world just consists of Bitcoin, Tesla, Amazon and Facebook, this is not the case and many of these stocks will come to the fore when circumstances change and bond yields move because of inflation.”
Broadening out of performance across US stocks
Despite forming over 22% of the S&P 500, Felix Wintle, manager of the VT Tyndall North America fund, does not currently own what have become known as the Fanmag (Facebook, Amazon, Netflix, Microsoft, Apple and Google) stocks within his portfolio.
This, he said, is because there are plenty more opportunities further down the cap scale.
“As investors continue to rotate their exposures to take account for the rising 10-year bond yield, the post-Covid recovery and the return of inflation, mega cap tech is likely to continue to be a source of funds,” he said.
Given that large cap tech has gone through periods of underperformance before, Wintle said this recent bout is no reason within itself for investors to sell. However, he added there are other factors to consider.
In addition to the fact these stocks are well owned by investors and feature widely in passive and active funds, he said there is the additional factor that there has been a broadening out of performance as the market has started to price in a Covid recovery.
“The rebound in the Russell 2000 index is the best example of this, having risen by almost 50% since July,” he said. “This can be seen by looking at the equal weight S&P 500 which has been outperforming its market cap weighted cousin, since the summer. The ‘average stock’ has performed much better than its much larger counterpart.”
Question of liquidity
“Over the last decade, during a period of scarce growth, tech has dominated earnings growth,” added Neil Campling, head of TMT at Mirabaud Securities. “That scarcity has driven significant valuation gains as well as price gains.
“If we are entering a phase when wider growth characteristics are emerging, when commodity prices are surging, when bond yields are rising, and inflation appears to be a coiled spring, then tech ‘scarcity growth’ becomes less attractive on a relative basis.”
If technology does start reversing, Campling also noted that liquidity becomes an issue and said the most liquid names have done little for the last six months – the best example is the Faang stocks.
“When people need to sell the less liquid names, you then get further downside pressure,” he said.
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