Technology stocks have been a recent favourite, but investors worry it will fade

Foreign Direct Investment
| The European | 4th June 2020

In the aftermath of the pandemic-induced market crash, tech companies have had a couple of solid months. However, many investors are questioning whether those stocks are able to maintain their momentum if jobs do not recover soon. 

Roughly three months after the rapid spread of the COVID-19 spurred unprecedented lockdowns across the world, pushing the unemployment rate to levels not seen since the Great Depression, the Nasdaq 100 Index briefly notched a new intraday high, making it the first major stock benchmark to post new highs since the crash. 

With more than 75% of the weight of the full Nasdaq Composite among its constituents, the Nasdaq 100 is the benchmark for the popular Invesco ETF QQQ, the 5th-largest equity ETF with more than $108 billion in assets, according to Lipper. The Nasdaq Composite Index, meanwhile, remains about 2% below its record close. 

Yet while numerous technology companies and their investors have benefited from the pandemic by driving greater adaptation of ecommerce, remote work and cloud computing, the risk is that the slowdown in the real economy will soon catch up to the gains. 

“No matter who you are, you need healthy customers who have a budget to pay you,” said Kevin Landis, portfolio manager of the Firsthand Funds, who expects companies he holds such as streaming firm Roku Inc and online education company Chegg Inc to struggle to expand if unemployment remains high. “If the overall economy suffers that is going to take some steam out of the tech companies eventually.” 

So far, the Nasdaq Composite has proven more resilient than other broad market benchmarks, in part because it has little exposure to sectors such as energy, retail and travel companies whose shares have cratered 50% or more since the start of the year. The S&P is around 8% below its own all-time closing high, hit on Feb. 19. 

Additionally, cash-rich technology companies have become a safety play during a time of market turmoil, crowding investors into a small number of stocks such as Alphabet Inc, Amazon.com Inc, Microsoft Inc and Apple Inc , said Jamie Cox, managing partner for Harris Financial Group. 

“Owning tech in this environment is considered not speculative but safer than consumer brands that would have traditionally been safe,” said Cox, adding that many large technology companies now pay attractive dividends. 

Several well-known companies, including Amazon, Facebook Inc and Zoom Video Communications, have already soared past the highs they notched before the coronavirus crisis. 

 

RISING RISKS 

The impact of a sustained slowdown in the economy has so far been masked by widespread expectations of further stimulus measures from Congress or the Federal Reserve, said Jim Callinan, portfolio manager of Osterweis Emerging Opportunity Fund, leaving the Nasdaq primed for an outsized fall if those measures fail to materialize. 

“We really need to make sure that consumers are okay and feeling good within their economic viability,” Callinan said. 

With the valuation of technology stocks stretched overall, investors should gravitate toward companies that rely less on the direction of the economy, said Mike Lippert, a portfolio manager of the Baron Opportunity Fund. 

Lippert has been adding to companies such as cybersecurity firm Crowdstrike Holdings Inc and cloud communications firm RingCentral Inc that are likely to be adopted by businesses regardless of the broader consumer backdrop. 

Brian Jacobsen, a senior investment strategist for the Wells Fargo Asset Management Multi-Asset Solutions team, said his firm remains long on the Nasdaq while shorting the S&P 500. Still, he is cautious that economic demand may start to slow. 

“Businesses are feeling pressure to invest in technology as employees who are accustomed to working from home will want to continue doing so with better in-home set-ups,” he said. “But at some point, there needs to be an economic turnaround to justify the spend.” 

 

Reported by David Randall 

Sourced Reuters 

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