The bull market run of the past dozen or so years has been tremendous fun, especially if you went big on the most rampant sector of all, US technology stocks.
The doomsayers repeatedly called an end to the fun repeatedly, but got it wrong every time.
Now, investors seem to be torn, with some thinking the good times are finally over and others reckoning the best is yet to come and positioning themselves to take advantage of the next stage of the tech revolution.
Today may seem a strange time to be optimistic as the post-Covid-19 recovery starts to look shaky and the Chinese economic miracle seems imperilled by the towering $310 billion worth of debt for property company Evergrande.
Yet, that has not deterred Goldman Sachs Asset Management from launching a new actively managed exchange-traded fund targeting the successor to the all-conquering FAANG tech titans – Facebook, Apple, Amazon, Netflix and Google-owner Alphabet (let us not forget Microsoft here).
The Goldman Sachs Future Tech Leaders Equity ETF, launched on September 16, will target listed technology companies with market capitalisations of less than $100 billion across developed and emerging markets.
Too many investors are now exposed to the mature FAANG mega caps, which make up 25 per cent of the S&P500, but the “dominant tech franchises in 10 years will be very different from the platforms we all know today”, says Katie Koch, GSAM’s co-head of fundamental equities.
The ETF is hunting for the next tech moonshots to stay on “the right side of disruption and innovation”, Ms Koch adds. “It’s going to be another company’s chance to be up another 175,000 per cent since its initial public offering.”
So that is where we stand now. Some are star struck by the potential offered by disruptive tech, no doubt bolstered by the success of Cathie Wood’s Ark Innovation ETF, while others are wondering whether the wheels are about to come off.
While there is good reason to be excited by the long-term prospects of US tech, there are equally good reasons to be worried about the short term.
While the MSCI World index is up 18.29 per cent in the year to August 31 and the USA MSCI Index is up 21.06 per cent, Chinese shares are down 12.08 per cent.
Chinese premier Xi Jinping’s anti-trust investigation into the powerful tech sector wiped more than $1 trillion from tech giants such as Alibaba Group and Tencent Holdings. Now, Mr Jinping is trying to rein in the country’s indebted real estate sector to contain Evergrande contagion.
Few expect another “Lehman moment” because the Chinese authorities will not allow it, but they are holding their breath to see whether the world’s second-largest economy can escape serious damage.
It is not just China. Covid-19 remains a menace and further shutdowns cannot be ruled out this winter. Global supply chains are being squeezed, threatening shortages. Energy prices are soaring. Inflation is a growing worry. It has already hit 5.2 per cent in the US and other countries are starting to feel the impact.
co-head of fundamental equities, GSAM
Perhaps the biggest worry is that monetary and fiscal stimulus will soon be scaled back, with US Federal Reserve chair Jerome Powell indicating on Wednesday that the test for tapering was “all but met”.
The Fed is prepping markets for a tapering announcement in November because it is close to meeting its goals of price stability and full employment, says Caleb Thibodeau, associate for global capital markets at Validus Risk Management.
“Tapering could be concluded by as early as mid-2022 and interest rates, which have a separate schedule and criteria checklist, may potentially start taking off by the end of 2022,” Mr Thibodeau says.
Matt Weller, global head of research at StoneX Financial, agrees. “This was a more hawkish development than many were anticipating.”
Deep down, every investor knows the post-financial crisis bull run is a phoney one, built on near-zero interest rates and endless stimulus. Now, we are going to find out what happens when that process goes into reverse.
It is possible the shakeout has already begun, says Jason Hollands, managing director of Tilney Investment Management Services.
“Monday was one of the worst US sessions this year, with the S&P500 down 1.7 per cent. Tech stocks underperformed, with the Nasdaq shedding 2.19 per cent and FANG+ index of 10 mega-cap stocks down 3.16 per cent,” Mr Hollands says.
Trying to call the top of a market is a mug’s game, he says. “But when the US market is repeatedly hitting an all-time high and valuations are extremely rich compared to history, it is wise to tread with caution.”
Just as the FAANGs have led the bull market, they could lead the downturn as well. “When the steam gets let out of the pressure cooker, I wouldn’t want to be too heavily exposed to the most expensive parts of the market,” he says.
Mr Hollands understands why Goldman Sachs is targeting the next generation of disrupters instead. “It makes more sense than continuing to throw more cash at those who are morphing into conglomerates.”
Some might argue that Goldman Sachs is late to the game with its new ETF launch, says Peter Garnry, head of equity strategy at Saxo Bank.
head of equity strategy, Saxo Bank
“However, if Cathie Wood from Ark Invest is right, then we are looking into decades of innovation and new technologies that will create enormous value for society and shareholders.”
Do not assume a repeat of the FAANGs, though, Mr Garnry says. “Potential higher inflation and interest rates over the next decade could make the environment for innovative technology companies less rosy compared to the previous 10 years.”
Digitalisation, robotics, genetics and biotechnology will continue to drive innovation. “More speculative technology companies with high growth rates and low profitability could be hit by rising inflation and interest rates,” Mr Garnry says.
The global economy is changing fast and the era of record growth and easy finance is now over, says Olivier Marciot, senior portfolio manager at Unigestion.
“It has turned into a slowing recovery with higher inflation and decreased monetary support. Risk assets have finally started to reflect this planetary misalignment,” he says.
This may just be a glitch. Or it could be the start of global stagflation, that ugly combination of stagnant growth and rising inflation, last seen in the 1970s.
Unigestion’s research suggests the recovery peaked in June and China, the US and Europe are now slowing.
Everybody now expects more inflation – except central bankers. Examples of skyrocketing input prices are legion, Mr Marciot says.
“Aluminium and coal prices are up 50 per cent since their pre-Covid-19 levels, transportation costs to move a container from Shanghai to Los Angeles have increased seven times, electricity prices by a factor of five. The list goes on,” he says.
Growth may slow, but that will be from recent inflated levels and Mr Marciot sees one potential positive: “It should relieve pressure on central bankers to taper.”
It is too early to write off the FAANGs, says Dan Flax, senior technology sector research analyst at Neuberger Bermann.
“Their relentless pace of innovation and aggressive levels of investment in people, R&D and capital expenditures allows them to constantly reinvent themselves, attracting users and advertisers.”
investment director, AJ Bell
Big Tech has shown it can learn from its mistakes and deliver valuable, innovative products and services. “This should help them create additional shareholder value over the medium term,” Mr Flax says.
Global growth jitters may actually boost sentiment towards the FAANGs, says Russ Mould, investment director at AJ Bell.
“Mixed data from the US and Europe, sagging industrial metal prices and Evergrande worries may persuade investors to pay for what they see as reliable, dependable growth,” he says.
A lot now rides on Apple’s latest iPhone model and product range shake-up, Mr Mould says. “Apple’s monster $2.4 trillion market cap means that any slip or loss of earnings momentum could leave shareholders with a problem.”
Suddenly, the world’s biggest company has a lot to prove. “It has to keep regulators sweet, persuade customers to upgrade to 5G mobile devices and show shareholders that an expected 70 per cent surge in earnings per share in the year to September 2021 is not just a one-off triggered by the pandemic, lockdowns and working from home.”
Many forget that Apple issued a “crunching profit warning” as recently as January 2020, Mr Mould says. “It could happen again, if the latest set of product features fail to capture consumers’ imagination.”
If it does, we could all suffer. “The FAANGs make up a quarter of the S&P500. If they fall, they could take the index with them,” Mr Mould says.
Big US tech has transformed how we work, learn, shop, play and communicate. They have given us cat videos, too. They look unassailable today, Mr Mould says, but cautions: “So did the ‘Nifty Fifty’ stocks in the 1970s.”
