Technology stock valuations have returned to the limelight after a week in which the sector surpassed another dotcom boom record.
Although the Nasdaq passed its 2000 peak back in April 2015, July 19 marked the first time that the S&P 500’s tech sector beat its own closing high from the same era.
The sector has risen 23 per cent this year, driven in particular by the ‘Fang’ stocks – Facebook, Amazon, Netflix and Google (now Alphabet) – pushing US portfolios higher still as the nation’s bull market enters its ninth year.
The rises are being accompanied by signs of volatility: a warning came at the end of June when the sector sold off sharply. Luca Paolini, chief strategist at Pictet Asset Management, said the firm had cut back its exposure to the area.
“While the long-term case for tech remains on track to benefit from the digital revolution (and is the sector with the highest expected return), tactically this is the time to take some profits. We have cut tech stocks to a [single digit] overweight,” he said.
Chris Godding, chief investment officer at Tilney Group, said there were “clear signs of euphoria in parts of the [equity] market, notably technology.”
But plenty of managers continue to back the sector, as shown by the strong recovery for tech seen so far this month – a move which suggests many investors viewed the June sell-off as a buying opportunity.
Richard Saldanha, global equity manager at Aviva Investors, said investors should look past the Fang quartet.
“The semiconductor industry is delivering very good organic growth and free cash flow, which is attractive in an environment where top-line growth is hard to come by.
“Add to that the significant improvement in margins plus healthy demand for auto and industrial chip technology and we firmly believe these stocks can continue to drive the market. It is also worth noting that income investors have been gravitating over to the sector as companies are starting to use their healthy cash generation to pay attractive dividends.”
Mr Saldanha is one of these investors: his Global Equity Income fund counts technology as its second largest sector exposure at 13.3 per cent of the portfolio.
Despite tech stocks’ role in rising US equity valuations, Pictet’s Mr Paolini suggested other global equity regions could be more seriously affected should a prolonged reversal unfold.
“Tech is also a big part of the emerging equity world – 27 per cent of the MSCI Emerging Markets Index compared to 17 per cent of the MSCI World, so it also makes sense to reduce exposure to EM equities.
“Despite the fact that US equities remain by far the most expensive region, and we are still cautious in the long term, they have historically held up relatively well during periods of global equity downturn.”
On a global basis, the MSCI World IT index traded at a price-earnings ratio of 24 times as of the end of June, only slightly higher than the MSCI World’s 21.4 ratio.
There is little doubt most managers continue to face in the same direction. Bank of America Merrill Lynch’s July fund manager survey saw 68 per cent describe US or global internet stocks as expensive, with a further 12 per cent calling them “bubble-like”.
Being long the Nasdaq was viewed by respondents as the most crowded trade for the third month in a row.
IN NUMBERS
24
PE ratio of the MSCI World IT index at the end of June
27%
Technology’s share of the MSCI Emerging Markets index
