Why the 'tech wreck' is no dotcom bubble

Technology stocks have suffered over the past week in what has been called the 'tech wreck'.

But many believe this is no repeat of the dotcom bubble at the turn of the millennium.

In the US, tech giants Microsoft, Apple, and the high growth 'FANG' stocks – Facebook, Amazon, Netflix, and Google-owner Alphabet – have been slowly sinking.

The sell-off wasn't limited to the US either; in the UK on Monday, cyber security firms Micro Focus and Sophos followed suit, falling 2.5 per cent and 3 per cent respectively.

Investors' fears were prompted by a report from Goldman Sachs analyst Robert Boroujerdi, who asked whether the tech sector had run out of steam.

With the tech-heavy Nasdaq index returning 28 per cent in the past year compared to 17.5 per cent for the S&P 500, Boroujerdi compared current valuations unfavourably to the early noughties dotcom bubble. 

That saw the Nasdaq crash by 10 per cent in a few weeks amid panic selling at the peak of the market, following a period of intense growth.

The dotcom companies became worthless within a matter of months. 

Although this week's sell-off was over almost as soon as it started – most UK tech stocks were trading comfortably by Tuesday – the seed of doubt will have already been planted in many investors' minds.

But Richard Champion, deputy chief investment officer at Canaccord Genuity WM, said that unlike the dotcom firms, big tech names such as the FANG stocks justify their price with powerful businesses and huge amounts of cash.

'Back in 2000, all that the tech companies had were interesting business plans,' Champion said. '[FANGs] are nowhere near approaching the egregious levels we saw back in 1999-2000.

'The performance of tech this year has been very strong, and, particularly as the Trump trade has given up most of its gains, a pull-back is neither unhealthy, nor unnatural.'

For broad exposure, he recommends investing in the Polar Capital Global Technology fund, managed by Ben Rogoff and Nick Evans, and the Scottish Mortgage Investment Trust, managed by James Anderson.

Gavin Haynes, managing director at Whitechurch Securities, said technology stocks have shown exceptional gains over the past year, and by all accounts look very expensive even after last week's sell-off.

Indeed, the graph, left, shows that, over the year, Facebook's share price has risen by 33 per cent and Netflix's by 60.5 per cent compared to just 17.5 per cent across the whole S&P 500 – great for shareholders but bad for those entering the market.

'It is not surprising as investors continue to focus on areas of the stock market that can demonstrate strong levels of growth in what continues to be a low-growth global economic climate,' said Haynes.

In the US, tech giants Microsoft, Apple, and the high growth 'FANG' stocks – Facebook, Amazon, Netflix, and Google-owner Alphabet – have been slowly sinking.

He added that a correction in the price of the tech behemoths would be a good opportunity for investors to gain access to the best members of a sector that will remain a key driver of global growth.

But in the meantime he recommends the AXA Framlington Global Technology fund, managed by Jeremy Gleeson, and the Henderson Global Technology fund, managed by Stuart O'Gorman.

Thomas Becket, chief investment officer at Psigma Investment Management, said the sell-off demonstrated how vulnerable large technology companies can become following a major rise, but he urges investors not to give up on the sector as it offers a huge variety of opportunities.

He recommends US cyber security firm Palo Alto Networks and European battery technology firm Umicore.

'We would be looking to add to those names in the event that the sell-off in tech gathers momentum, but would remain wary on the more popular names, unless we see a material pull-back,' he said.

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June 16, 2017

Sources:` Daily Mail

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