The tech bull market: out with new, in with the old?

This article is part of
Guide to US Equities

Tom Wildgoose, who runs the Nomura Global High Conviction fund says: “As is the case in any sector, you need to be stock specific in your tech sector analysis.

"The outperformance from the FANG stocks was as a result of huge and unexpected – by market standards – disruption-led growth.

"Investors simply did not anticipate the impact of these companies, however this is much better understood now, so such dramatic outperformance seems unlikely.

"Amazon is still on very high valuation multiples and continued outperformance looks challenging, although this has been the case before.

"Netflix is a similar case; again the growth was better than generally expected.

"From here, Amazon’s business looks more defensible than Netflix, which is a positive for the stock, but such high valuations make neither look attractive to us.”

James Thomson, who runs the Rathbones Global Opportunities fund is another global equity manager who is keen on the shares of large US technology companies, though he believes that the company’s that will do best in future have somewhat different characteristics to those that have done well to date.

US advantage

He said: “The enormous advantage the US companies have in terms of technology is not going away, it is a permanent advantage, and as businesses they are very attractive, with lots of recurring revenue and high profit margins.

"Amazon have spent a lot of money growing their business, and that is a stock we own.

"We also own Microsoft, they have started to win a lot of business clients for their cloud computing business, we like that they are winning business clients, and think generally it is an attractive area of growth for companies in the future.”

But while Mr Thomson is optimistic about the prospects for the largest US technology companies over the long-term, he is more cautious about the shorter-term outlook.

This is because the share prices of the big US technology companies have benefited from the popularity of the growth style of investing over the past decade.

The growth style of investing tends to do best when interest rates and GDP growth are relatively low.

This benefits technology companies in two ways.

The first is that most of those businesses do not pay dividends, something which matters less when interest rates are low, because investors who could choose to place the cash in the bank to receive interest payments, have less incentive to do so, and so are more likely to place it in equities.

But after a ten year positive run for growth equities, the second half of 2019 has been a different story, as the value equities have performed better,  and as optimism that the US may avoid recession has grown.