Has the US tech bubble burst?
After a strong rally during the COVID-19 pandemic, major US technology stocks have come crashing down as the NASDAQ saw Tesla drop 21%, Apple drop 6.7%, Microsoft drop 5.4%, Amazon drop 4.4% and Facebook drop 4.1% on Tuesday.
Evan Metcalf, ETF Securities (ETFS) co-head of portfolio management, said the technology sector had, on the whole, fared extremely well across the COVID-19 pandemic with a swift recovery after initial volatility in March.
“The strong run of the technology sector has seen some investors start to question valuations and the current tech price drop may reflect a correction in pricing,” Metcalf said.
“The long-term prospects for the technology sector remain strong, particularly given the relevance to major trends such as cloud computing and e-commerce.
“In the coming month, Tesla is expected to make significant new technology announcements and Apple has announced a special broadcasting event, both of which could be share price positive.”
Jacob Mitchell, Antipodes Partners chief investment officer, said investors should reflect on the fact that this year alone, the NASDAQ had recorded 45 record closes and the S&P 500 had achieved 22.
“The recent volatility remains a blip during an extended period of market extremes surpassing the dot-com bubble, but is a salient reminder of the risky game many investors who continue to ignore value and blindly chase momentum are playing,” Mitchell said.
“Trying to pinpoint a market turning point is typically fraught, however we’re in for a very interesting period and extraordinary multiple dispersion leaves us confident that the long-term future market leaders are most likely to be today’s misunderstood lower multiple stocks.”
According to FE Analytics, there were seven funds that held Tesla in its portfolio from BetaShares, Hyperion, T. Rowe Price, Colonial First State (CFS) and ETFS.
Over the previous 12 months to 31 August, 2020, BetaShares NASDAQ 100 ETF returned 43.95%, followed by Hyperion Global Growth Companies (38.89%), BetaShares Global Sustainability Leaders (27.84%), T. Rowe Price Global Equity (24.44%), and CFS Wholesale Global Share (12.86%) which also offered a currency hedged (8.2%) version.
The ETFS FANG+ ETF had returned 48.04% since its launch on 5 March, 2020, to the end of August.
David Bassanese, BetaShares chief economist, said we were seeing an overdue correction in markets that had moved too far too fast in recent months, especially in the US tech space.
“The more Tesla's share price increased, the more likely it seems it would be included in the world's preeminent stock index [the S&P 500],” Bassanese said.
“Which in turn was expected to drive prices even higher due to the associated need for many index-hugging institutional investors to start holding the stock.
“Tesla's surprise exclusion from the latest re-balance, along with revelations that a major Asian investment company (SoftBank) had built up huge and potentially vulnerable positions in some major US tech companies, appears to have pricked the bubble in short-term speculative fervour.”
Performance of funds that hold Tesla over the previous 12 months to 31 August 2020
AUTHOR
Chris Dastoor
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