Tech contagion unlikely to spread to broader markets

Dubai: The much-talked about sell-off in technology companies in the United States is unlikely to affect broader markets, and analysts say the decline won’t last for long.

Technology companies in the US witnessed sharp fall last week after Goldman warned that investors had become complacent to their risks and were treating them like defensive stocks.

Since June 9, the Nasdaq-100 Technology Sector Index has shed more than 4 per cent, compared to a 1.5 per cent fall on the Nasdaq index.

But analysts are sure that the sell-off won’t trigger a wider market meltdown, and could be a part of stock rotation.

“We do not expect this technology sell-off to last long, as we are still seeing supporting fundamentals and rising cash distribution... we believe such corrections are healthy and sustain performance in the long run,” said Maximilian Kunkel, chief investment officer at ultra high net worth strategist at UBS.

“Over the past few years, we have seen similar low-mid single digit corrections on a regular basis as investors rotated into value stocks,” Kunkel said.

Valuations

Fund managers feel that extended valuations in tech stocks after their impressive performance so far in the year, and has nothing to do with fundamentals.

“We see it as a function of the sharp rise we have seen in these names in the year to date and the profits that holders can pocket by selling, than anything to do with fundamentals,” Neil Robson, global equities portfolio manager at ColumbiaThreadneedle Investments, told Gulf News.

“Could the rotation last a bit longer — sure it could. Is it the end of the bull market in these tech names — absolutely not,” Robson added.

According to a fund managers survey done by Bank of America Merrill Lynch Global Research, about three quarters of investors surveyed say internet stocks are expensive, while the other 18 per cent say the situation is bubble-like.

Reduced exposure

Columbia Threadneedle has reduced selected tech positions but retains an overweight stance to the sector.

UBS feels weakness in the technology sector could be a big negative for its overweight in global equities. UBS is overweight global equities, 17 per cent of which pertain to the technology sector, second only to financials in weight, but is still positive on tech given the strong earnings.

“In this environment, earnings growth and positive earnings revisions are key to sustaining global equity markets. The first-quarter earnings delivery was the best in 6-7 years, with above-average positive surprises and double-digit growth seen in all the main regions. This appears sustainable, given strong revenue growth and an increase of confidence seen in companies,” Kunkel said.

For instance, 39 per cent of S&P 500 companies raised revenue guidance in the first quarter, the highest number seen in the last five years, which was mainly due to the current synchronised global uptick in GDP growth and higher oil prices.

Columbia Threadneedle said it is still drawn to tech companies. “We are attracted to growth businesses with strong franchises and barriers to entry and in the modern world we see innovation as one of the main drivers of competitive advantage. The tech sector is obviously a major source of potential ideas for us,” Robson said.

Robson thinks that energy, financials and selected industrials could be the sectors that could take over from technology in the near term.