Portfolio managers Rosie Bullard and Mark Leach share their views on the recent correction in tech stocks.
Mark Leach, Portfolio Manager, James Hambro & Partners
Mark Leach: Technology stocks had certainly become quite stretched. They have been core drivers of the strong returns in equity markets this year and if they had maintained their recent pace to the end of the year returns would have annualised at 40%, which is unsustainable. Some market consolidation is healthy and to be expected.
Looking at the price action on Friday in closer detail, it looks more like investor rotation than a protracted bear market in technology. Evidence for this was the outperformance of sectors that have been extremely lacklustre during the year, including the energy sector.
There are some significant risks to large technology stocks due to regulation and Government intervention. We are seeing pressure for a crackdown on fake news and enabling terrorism and there could also be efforts to get these companies to pay more tax.
But what has really changed since Friday morning? Not a lot. The facts remain that people will not stop shopping on the internet or using Google to search, or checking their Facebook. These companies make real earnings and dominate market share and consumer attention. There is no doubt that the speed of the rally this year means that we would expect periods of negative return and consolidation throughout the sector, but when we analyse the underlying trends that are driving the cash flows of these businesses we remain positive in the long term.
Rosie Bullard, Partner and Portfolio Manager, James Hambro & Partners
Rosie Bullard: What this price movement does highlight is a potential risk for passive investors. The recent technology run and the growth of passive investing means many investors are far more exposed to tech stocks than they might imagine. They are now a dominant part of key indices.
Before the correction over 10% of the Vanguard S&P 500 ETF was accounted for by just five companies – Apple (which is over 3.6% of the Fund), Alphabet (Google), Microsoft, Amazon and Facebook.*
As of the end of April, Apple was 1.9% of the MSCI AC World Index, whilst Microsoft was 1.2%, Amazon 0.9% and Facebook 0.9%, so when these stocks move, they have an impact on global markets.
Active investors need to be aware of this too – flows into passive funds can drive stock market returns, stretching and distorting values. It means there will be times when it pays to take some profits. We have to keep our eye on the underlying fundamentals that drive the demand for company products and their ability to turn those sales into cash profits.”
* Data from 30.04.2017