Market Views: Will anything derail the tech stock surge?
Technology companies are the undisputed kings of global stock markets right now, and with good reason.
Already hugely popular with investors before Covid-19 took hold in the first quarter of the year, the pandemic has underlined how central the sector has become to our lives: from digital communications, e-commerce, the cloud and data centres to more specific areas such as biotech and edutech.
For the past five years, two-thirds of the gains in the US’s S&P500 have been driven by just six American companies – Facebook, Amazon, Apple, Netflix, Google (Alphabet), the so-called Faang stocks – and Microsoft, reported Bloomberg on July 13. An index of those six stocks was up some 62% since the March lows, while the S&P 500 rose 40% in the same period, added the article.
Apple, Microsoft, Amazon, Alphabet (Google’s parent) and Facebook now account for 23% of the S&P500, said Lombard Odier in a note on August 19. Tech companies as a whole – including interactive media, internet and direct marketing – make up 38.5% of the MSCI USA index, 8.9% of MSCI Europe and 48.2% of MSCI China, the note added.
In 2010 two of the world’s largest 10 companies by market capitalisation were tech firms; today the sector accounts for seven of them, and two of those – Alibaba and Tencent – are Chinese, noted Lombard Odier.
And Ant Financial, an affiliate of Alibaba, is widely expected to create the world’s largest IPO – by raising $30 billion-plus – when it lists in Hong Kong and Shanghai, as is expected this year.
Questions are inevitably being asked about whether rocketing tech company valuations are justified or sustainable, and there are growing calls for tougher regulation.
The chief executives of Facebook, Amazon, Apple and Alphabet were grilled in a combative congressional anti-trust hearing on July 29, in which they were hit with accusations that they had repeatedly abused their economic clout.
The market didn't blink: the share prices of Alphabet, Amazon and Facebook have risen 9%, 15% and 28%, respectively, in the month since. Apple has also gained executed a stock split on August 31 that is expected to make its shares even more attractive to a wider range of investors.
But surely what goes up must, at some point, come down? There have been repeated warnings that tech stocks are in bubble territory and due a correction.
AsianInvestor here presents views from four investment experts on questions such as what could derail tech stocks’ progress and whether it is time to reduce exposure to the sector or least diversify more into other areas.
Arnout van Rijn, Asia Pacific chief investment officer
Robeco (Hong Kong)
In Asia, as elsewhere, financial markets are now driven by technology companies that have become clear winners in the lockdown environment and represent about 30% of the Asia Pacific equity benchmark.
Asia is a strong beneficiary of the accelerated move towards digital, as companies in the region supply most of the hardware and increasingly also most of the software. Even the raging trade war between the US and China benefits Asia, as Taiwanese, Japanese and Korean companies have become key suppliers for those that cannot or will not use American tech products.
What could make [tech companies in Asia] stumble is competitive pressure on pricing and margins. That may eventually come from China. However, the likelihood of two parallel tech universes – China and the rest of the world – being constructed thanks to the trade/tech war will also give rise to additional demand.
Most fund managers are relatively heavily exposed to technology, including sectors like internet and e-commerce. Our funds are overweight too, and we don’t recommend reducing exposure yet. We don’t particularly like to be in a consensus position but are nimble enough to realise that the consensus can be right.
The second reason for a stumble could thus be a rapid reduction of global liquidity. Many analysts have been too conservative in their earnings estimates for tech companies. We have therefore seen upward revisions of outlooks for both Asian hardware and software companies, which is rare in a cyclical downturn.
With many investors having garnered outsized alpha from heavy tech positions, it is always tempting to take profits or protect the downside. In some cases, where we believe expectations are too high, we have taken some profit too.
Munish Randev, chief executive
Cervin Family Office (Mumbai)
The pandemic lockdowns provided the biggest tailwinds to all things tech across the world. The sudden push towards increased tech adoption – from cloud and working-from-home solutions to e-commerce and fintech – shone the limelight onto these stocks.
The US markets became absolutely enamoured by the Faang [Facebook, Amazon, Apple, Netflix, Alphabet (Google)] stocks after the initial market crash. Apple added $1 trillion market cap in six months, and many tech IPOs are hitting the markets soon.
The tech industry was also able to shift to remote working without many issues, albeit with security issues persisting. As in all sectoral bull runs, we will have some semblance of reality after the initial Fomo [fear of missing out] response.
We believe that it would be a good time to trim exposure to US tech stocks but not exit completely. The emergence of a fully approved vaccine [for Covid-19] is a key trigger for any move up in the non-tech space.
Meanwhile, Indian technology stocks are largely the big software development platforms, which thrive on outsourcing, with a few niche smaller players in cutting-edge technologies.
The Indian market does not have large players akin to Apple or Microsoft, and many new age, cutting-edge companies are still in the private market space. This includes sectors with tailwinds like edutech and healthtech.
[Research firm] Gartner has predicted an increase in outsourcing spend, and on top of that another factor affecting Indian tech stock valuations is rupee depreciation. [The Indian currency fell sharply against the dollar in March but has rebounded slightly in the second half of August.] Hence at a time when the economy is not doing well and the currency is weakening, tech stocks have become even more popular.
Stephane Monier, chief investment officer
Lombard Odier (Geneva)
Through the worst economic crises of the past century, technology stocks have gained, flouting forecasts of their demise and lifting equity indices more widely.
Technology names continue to defy the gravity of the broader corporate world. Along with healthcare, technology is expected to show the fastest growth in earnings per share (EPS) among equity sectors next year, compared with 2019. EPS growth for the tech sector in 2020 is estimated at +2.5%, according to Datastream, compared with an expect drop in EPS for the MSCI World index of -20.4% this year.
Still, investors rightly wonder whether current valuations, at their highest for the past decade, are sustainable. Price-to-earnings (P/E) for technology stocks are forecast at 26 times earnings for 2021. That compares with a P/E ratio for the MSCI World index of 18.8 times earnings for next year.
A traditional risk complication for investors is the political interest in addressing the perceived lack of competition in technology. But it is hard to see US politicians hamstringing US tech companies, faced with the strategic leadership challenge from China.
In any case, these companies provide such essential technologies in our daily lives, offering structural growth opportunities for investors, that it is harder than ever to imagine building a portfolio without them.
Steven De Sanctis, US equity strategist
Jefferies (New York)
Overall, we are market weight technology in the US, across both large and small/mid-cap stocks.
While the gap in valuations [between the biggest and smallest stocks in the index] is nearly as wide as we saw in 2000 [just before the so-called dotcom crash], tech businesses are in much better shape today [than in 2000]. They are delivering earnings growth and, most importantly, revenue growth, which most other companies have not come close to delivering.
As for small- and mid-cap tech stocks, we see their performance coming back in line with the overall universe next year, with cyclical sectors, such as industrials and materials, outperforming. The simple driver is that earnings growth will start to broaden out as the economy improves and, with that, valuations should start to matter again.
With the US economy growing at less than 2% annually, it will be hard for the cyclicals to get moving, but that will not be the case in 2021. We watch interest rates and the shape of the curve as macro indicators for when a turn will occur.