Global Markets

Pockets of opportunities in tech stocks’ tumble ?

• The pressure on tech stocks amidst fears of increased regulatory oversight is not merely confined to the US. In the emerging markets, the tech sector which is now a dominant sector in these markets for the first time since 2004, is also experiencing the headwind.
• It is unclear if the selloff in the tech sector marks a permanent shift in the sector as the market leader or merely a temporary knock as it is tough to determine if politics is overshadowing fundamentals

• The current volatility may stay for the next few months due to regulatory overhang concerns. However, this situation bears no resemblance to the late 1990s dotcom bubble when hot money trading themes and ideas were flavours of the day.

• The hit on the tech sector could be an overreaction and it can regain its footing in the earnings season when it is supported by the fundamentals i.e. strong earnings, sales and balance sheets.

• Positive macro fundamentals and a healthy global growth and trade outlook provide good buying opportunities for those with a longer investment horizon.

• Volatility looks set to stay for a while, thus provides opportunities for day traders to profit from the movements of tech stocks on the long and short side. We presented in Tables 1 to 5 the tech stocks for Malaysia, US, HK, Taiwan and S. Korea based on our technical analysis.

A. Pressure on tech stocks amidst fears of increased regulatory oversight ?

• Tech stocks are under pressure amidst fears of increased regulatory oversight brought about by Facebook’s data scandal. As consumer data privacy is central to the competitive edge of these companies, the breach indicates the rising levels of their risks and uncertainties.
• The overwhelming size of US tech giants is a cause for concern, especially when we combine the five largest technology and internet companies. Currently, the overall tech sector has a weighting of 27% in the S&P 500, making it by far the largest component. Financial stocks are in the second place, accounting for 17%.

• Meanwhile, the tech sector’s growing clout is not merely US-centric. Tech stocks are dominating emerging markets for the first time since 2004. This sector has overtaken the financial sector to become the biggest sector in the MSCI Emerging Markets Index in 2017. By the end of 2017, the tech sector’s weighting is almost 28%, more than double its level six years ago based on the MSCI data. This explains why the tech wreck in US also hurt the tech stocks in Japan, South Korea, Hong Kong, and even Malaysia.

B. Will politics overshadow fundamentals? ?

• Until recently, the tech sector has been a reliable generator of big returns and a major driver of the market’s bull run. With the sector being battered, concerns are mounting on how significant the tech sector really is in relation to the broader stock market?
• It remains unclear as to whether the selloff in the tech sector marks a permanent shift in the sector as the market leader or is the selloff merely a temporary knock on the companies. It is difficult to ascertain the impact from the current selloff in this sector on the broader market. However, the declines exhibited by the tech stocks suggest a strong shift in investors’ confidence on the sector, at least for now.

• One key point to be considered is the legitimate concern on whether politics will overshadow fundamentals. If there are intense scrutiny on how the Facebook (FB), Google (GOOGL) and Twitter (TWTR) carry out their businesses, the risk of advertisers fleeing will increase. Furthermore, if the US president changes tax laws or introduces tougher antitrust laws, these businesses may potentially be hit.

C. Not a dot.com bubble ?

• Hence, the tech stocks will remain risky and stay volatile for the next few months owing to the regulatory overhang concerns. However, the current situation bears no resemblance to the late 1990s dotcom bubble when hot money trading themes and ideas were flavours of the day. The tech sector now is a developed sector with real earnings and cash flow.

• What could be happening now is that there is some decoupling of the tech stocks and the real economy. Therefore, the declines in tech stocks may not indicative of the broader economy. The reason is that in 2017, tech stocks were hit by pockets of underperformance that saw a shift from tech into other sectors. However, the shift failed to derail the rally.

D. Is the current wreck in tech sector more of an overreaction? ?

• It is not all doom and gloom in the tech sector as there is room for tech stocks to regain their footing. The earnings season can put the sector back to the pole position, largely supported by the economic fundamentals that should allow the stocks to perform well. More so when tech companies present strong earnings, sales and balance sheets.

• Thus, it is inappropriate to deduce the prospects of the tech sector from its recent weakness in relation to the broader market, especially given its strong run in recent years. On that note, the current wreck in the tech sector can be seen as more of an overreaction.

• If one looks at the longer perspective, room for the stocks to continue performing cannot be discounted, given that it is driven more by growth and momentum. Solid economic growth, low interest rates, strong corporate profit growth and prudent macro policies will continue to provide some tailwinds to the underlying economy of countries like the US, Japan, South Korea, Hong Kong and also Malaysia.

E. Focus on momentum ?

• With the positive macro fundamental outlook, healthy global growth and robust trade outlook in 2018, there are some good buying opportunities for those with a longer investment horizon. The focus should be on companies that are stable with strong business models. These companies may have fallen out of favour due to the adverse noises but can still offer solid returns even if the market volatility continues and the broader economy loses steam.

• In short, one should focus on momentum as an investment strategy with the aim of capitalizing on the trends in the market. This can be achieved by taking a long position, especially on stocks that have established a firm trend and are unlikely to move against the trend.

• In the interim period, the volatility looks set to stay for a while. As such, there are opportunities for day traders to profit from the movements of tech stocks on the long and short side. We presented from tables 1 to 5 the tech stocks for Malaysia, US, HK, Taiwan and S. Korea based on our technical analysis.

Source: AmInvest Research - 4 Apr 2018