Attention US Tech Investors: A Painful Snap-Back is Approaching.
Posted 01 December 20
The safe-haven for US technology investors will diminish.
The famous US Technology cohort (FAANGM) have defied gravity throughout the COVID-19 pandemic. However, relative valuations are now very stretched in some areas (Figure 1 below shows the valuation premium of the FAANGM stocks to the rest of the S&P500 based on forecast PE). We expect this premium to narrow, driven by the short and long terms factors discussed below.
Technology stocks, and other sectors that have been immune from the impacts of shutdowns, have provided a safe-haven for investors that wished to remain fully invested. With a vaccine now on the way, the safe-haven appeal will diminish, and the attractiveness of sectors previously impacted by COVID shutdowns will improve. As a result, we expect to see a short-term rotation away from technology stocks and a narrowing of the valuation premium.
Taking a longer lens, a common mistake during time of upheaval is to place too much importance on current experiences and extrapolate these trends into the future. The ability for a company to deliver secular growth, that is growth unaffected by slowing economic conditions, has been once such trend that has dominated investor thinking during the pandemic and in the years preceding.
This thinking is ensconced in an investment environment characterised by fiscal restraint, falling interest rates and tepid growth… clearly at least two of these three factors no longer holds. Should policy create a sustained period of stronger nominal growth then we would see a further rotation away from secular growth to cyclical sectors.
If it is not FAANGM, then what?
We think it's crazy to buy this technology growth at these stratospheric valuations, but it is a great time to buy fantastic ‘smart’ industrial business. In our Global Equity strategy, we are seeing 15%+ consensus earnings growth and a forward PE of 20 times. We find these prospects very satisfactory.
Peace of Mind Investing
Cameron Harrison have been advising business owners and their families on asset allocation and intergenerational wealth management for over 50 years. We have demonstrated over a long period our ability to manage investments through both the good times and bad by keeping the client at the centre of our business.
For more information on our approach to investment strategy or any other inquiries, please contact us on +613 9655 5000.
Photo by Sebastiaan Stam