Are the good times over for tech stocks?

Is the recent tech sell-off just a correction of a “too good to be true” rally or are we in a tech bubble?

Miro Zivkovic, Global Head of I&WD Product Management at Nordea Asset Management

Technology and social media stocks have enjoyed a bubbly soar since 2016, displaying stellar performances especially after the US Presidential election and as new US fiscal policy ramped up shifting investors’ focus to high growth companies. Investor hysteria for these market darlings led to FAANG stocks (Facebook, Amazon, Apple, Netflix and Google) representing almost 98% of S&P 500 index expansion in H1 2018. This irrational ebullience led to historically high Price Earnings Ratios (PER) unseen since the Internet Bubble, even as some of these hot stocks’ net profits were still mired in red ink and Facebook faced regulatory risk. Amazon and Netflix were among the 80+ PER companies.

Trade tariffs have changed the mood considerably. Investors’ risk appetite is fading rapidly amid complicated negotiations between the US and its trade partners, including China and Canada, which have triggered concerns about the potential consequences for global growth—emerging markets appear to be particularly at risk. The result has been a “flight to quality” that favours developed markets and more defensive companies with less stretched valuation.

The trend of investors reaching for safe harbours was magnified in October, as global equities tumbled. In addition, the sector rotation continued in both DM and EM equity markets. These behavioural discrepancies were also reflected in FAANG, as the stocks with more stretched valuations experienced a new swan dive—Amazon and Netflix lost around 20% in October. Many preferred tech stocks lost more than one-third of their market capitalization, with even sharper collapses seen (e.g. Facebook -38%, Nvidia -48%, SNAP -69%).

So, is this high-tech hangover a simple correction, or are we experiencing something much more severe? In this late cycle phase, investors have started to come back toward high quality stocks that had fallen out of favour after the US election, thanks to their lower sensitivity to the economic cycle, paired with both normalized valuation and higher business resilience. We could see an acceleration of this trend if markets slide out of control again. However, it is rather difficult to assess if we are facing something more severe, while from a technical perspective it is now clear that high-tech companies, as magnified by the social media sector, are now in a bear market.

On the other hand, it could be said that historically, valuation always matters and that stretched PER stocks tend to experience mean reversion regardless of their disruptive business or growth rate. As an illustration, this is what happened after the Internet Bubble, with some .com companies valued at 80/100+ PER, such as AOL which reached a market cap of USD 222B at the edge of this Internet hysteria and was finally bought by Verizon for USD 4.4B in 2015.

 


About Nordea Asset Management

Nordea Asset Management (NAM, AuM 216.8bn EUR*), is part of the Nordea Group, the largest financial services group in Northern Europe (AuM 311.5bn EUR*). NAM offers European and global investors’ exposure to a broad set of investment funds and portfolio management strategies. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Cologne, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Santiago de Chile, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

 *Source: Nordea Investment Funds, S.A., 30.09.2018

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and representative offices. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and representative offices are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and representative offices. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same, but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.

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