Stumbling stocks: Tech-tastrophe or tech-tantrum?

Last week, we asked whether it was the right moment to start taking profits on technology stocks. Investors across the world took note, deciding that the short-term answer is ‘yes’. The Nasdaq, a tech-heavy US index, fell 10.9% from its 3 September peak to its 8 September trough.

Between the start of the year and the end of August, the MSCI World: a global-equity index comprising 1,718 stocks, delivered a return of 5.7%. Just four companies: Apple, Amazon, Microsoft and Tesla, drove this positive performance, and more. The other 1,714 produced negative returns.

With that in mind, are we seeing the tech bubble burst, or a short technical correction?

Not a tech-tonic shift

We favour the latter interpretation. There are a few theories as to why the sell-off hit towards the end of last week, and has continued into this week.

Japan’s SoftBank has reportedly been furiously buying call options on mega tech stocks, potentially lining markets up for a retracement. The volatile moves in ‘big tech’ over the last few days have certainly been consistent with these reports. And there were hints of pretty irrational behaviour in the run-up to Thursday, with high-profile stock splits seemingly responsible for driving tech names higher on the days before.

News of vaccine developments in the US and UK and that Russian trials have triggered an antibody response may have resulted in a reduced demand for remote technologies, as the possibility of returning to work and resuming a ‘normal’ life slides into focus. From this perspective, an economic recovery, with the diminished central bank intervention this promises, may paradoxically be damaging for technology growth stocks.

However, no single story, in our view, presents a convincing catalyst for the move. The overall pattern of equity performance has not been consistent with a risk-off environment triggered by a market panic, or of particular virus developments.

Just give me a sign

We look for two signals when assessing the right time to exit technology stocks: excessive valuations and too much bullishness. In our opinion, neither is giving cause for concern yet. It appears that 2020’s outperformance has been driven by a step-change in earnings rather than valuations. Turning to investor sentiment, it is impossible to argue that tech is an unpopular sector, but we’re not worried about bulls in china shops yet. For context, we’ve been tactically positive on technology stocks (relative to the broader market) since early 2018.

Investors should be wary of the concentration conundrum, though. Apple’s value now rivals that of the entire FTSE 100 – an Icarus stock hovering close to the sun?

So, while we currently favour tech, a diversified approach may still be the way for investors to avoid being locked out when the market turns technophobic.