Tech stocks pause
Correction may be due to tech bubble resurfacing in US equity markets
PETALING JAYA: A tech bubble resurfacing in the US equity markets may be the reason for the correction among technology stocks listed on Bursa Malaysia.
While the tech-heavy Nasdaq rebounded on Tuesday after the biggest back-to-back decline since December last Friday and this Monday, sentiment turned a bit more cautious, with reports warning of stretched valuations for tech stocks.
Bursa’s tech stocks saw a rebound yesterday after a sharp fall on Tuesday.
Analysts, although initially confounded by the sudden downward move in these technology stocks, said it was not such a surprising thing after all in hindsight.
However, they were not so sure if the correction would sustain itself in the coming days or if it would be a buying opportunity.
“Valuations are on the high side at the moment while exuberance is minimal or absent altogether. It can go either way because the investing public are also generally cautious at this point in time,” a technology analyst with a local research house said.
The correction may present an opportunity for the late comers to accumulate, said a broker.
“The fundamentals are still very much intact while if you take cues from the US, many of these tech names such as Apple and Amazon are on a better footing this year,” he said.
The abrupt fall on the Nasdaq on both days also affected sentiment on the Dow Jones Industrial Average and the S&P 500.
Valuations of growth-driven technology companies have soared in recent times on better expectations moving forward.
The Nasdaq Composite Index had gained by some 15% in the year-todate period and now hovers near its all time high.
In fact, the research house noted that stocks had become closely correlated to safe haven plays, like bonds and utilities.
The momentous moves in the two trading days on the Nasdaq had reverberated throughout markets worldwide and technology stocks in markets elsewhere also saw declines along with the Nasdaq.
For the two trading days, the Nasdaq fell by as much as 4.38% at its lows but recovered by some 0.76% when trading resumed on Tuesday.
The Nasdaq consists of approximately 3,000 technology stocks and houses some of the key companies whose influence ranges far beyond US shores because of outsourced operations to other foreign companies or through direct equity stakes.
Some of these companies include mega-capitalised stocks such as Facebook, Apple, Amazon.com, Alphabet (the parent company of Google) and Microsoft. US tech stocks have posted decent earnings for the first quarter ended March 31.
In the latest World Semiconductor Trade Statistics’ Spring 2017 sales forecast, annual sales for this year and next year have been revised higher by 9.2% year-on-year (y-o-y) and 9.6% y-o-y to US$377.8bil (RM1.61 trillion) and US$387.9bil (RM1.65 trillion) respectively.
Higher growth rates have been assumed for all major semiconductor categories, with the largest growth stemming from the memory segment at 30.4% growth y-o-y.
Despite that, 2018 annual sales growth rate has been maintained at 2.7% y-o-y, with sensors contributing to the highest growth.
MIDF Research in a report dated June 8 noted that April 2017 saw worldwide sales of semiconductors surging by 20.9% y-o-y to US$31.3bil (RM133.35bil), the largest y-o-y growth since Sept 2010 when sales grew by 25% y-o-y.
MIDF Research has maintained a positive outlook stance on the technology sector as a whole.
NEW YORK: Blame the computers ... or the hedge funds ... or the hedge funds with computers.
Pundits have been grasping for the root cause behind the brisk retreat in tech giants like Facebook Inc, Amazon.com Inc, Netflix Inc, Alphabet Inc, Microsoft Corp, and Apple Inc that started on June 9 and carried through the weekend.
This group of stocks averaged a 1.6% decline over the past two sessions that still leaves the group up more than 20% year-todate.
Theories aiming to explain their sudden dip run the gauntlet from the reasonable to the absurd to the relatively boring.
Last Friday’s sell-off was part of a systematic unwinding of momentum strategy, according to Andrew Lapthorne, global head of quantitative strategy at Societe Generale SA.
Stocks that had done well over the past 12 months - regardless of whether they were in the Nasdaq 100 or S&P 500 - were the ones that took it on the chin. Tech shares have been the market leaders all year, with the likes of Apple, Facebook and Netflix up more than 30% before last Friday.
That compares to a 10% gain in the S&P500. “The uniformity of the prices moves all on the same day indicates a market driven by price chasing momentum, with investors heading for the door all at the same time,” he wrote in a note to clients on Monday. “Friday’s plunge serves as a warning; when it’s time to head for the door, you better move fast.”
To some, the tech selloff had its genesis in a Goldman Sachs Inc note put out a few hours before the move. The group of mega-cap stocks had been seeing exceptionally low levels of realized volatility that led to “positioning extremes,” Robert Boroujerdi, the firm’s global chief investment officer, said.
“Mean reversion risk is increasing,” he warned. And lo and behold, some reversion to the mean ensued.
Here’s another reason that doubles as an explanation for why volatility’s been historically low. A tweet from Citron Research’s Andrew Left calling for a steep decline in Nvidia Corp appeared to help clip the high-flying tech company’s wings - and was also cited by some as the cause for the broader selloff in the space.
Ironically, Left advised investors to take profits “and move on to Google” - a firm whose shares have also been hit, though not as bad as NVIDIA’s.
Brean Capital LLC macro strategist Peter Tchir raised the prospect of a sell program that had earlier targeted one of the most famous four-letter acronyms in the market - ‘FANG’ - resurfacing on Friday.
“On Wednesday morning, I highlighted that the only thing that had struck any fear into my streams of market chatter was the ‘FANG’ led sell program that started around 3 pm on Tuesday,” he wrote. “Whether Friday was a continuation of someone looking to drive this sector lower or just a coincidence remains to be seen.” And now for what seems to be the go-to reasoning for many market moves these days: monetary policymakers.
“If I wanted an alternative explanation of why tech stocks finished last week with a caning, I’d be sorely tempted to think about the greater fool theory and the BoJ,” writes Bloomberg’s Richard Breslow, citing market-moving reports of a communication tweak regarding the potential for some sort of balance sheet normalisation.
The Bank of Japan has become a massive player in not only bonds, but also domestic equities through its ETF purchases.
This argument is bolstered by the fact that Fast Retailing Co has done worse than the six aforementioned tech giants so far this week.
The BoJ owns roughly half of the free float of Fast Retailing, and the stock has a history of being influenced by rumours about changes to the central bank’s purchasing programs.
There’s also a theory floating around that the Swiss National Bank has been dumping its hefty tech holdings.
One potential culprit for the retreat in these leaders of the 2017 equity rally: hedge fund Viking Global Investors said they’d be returning US$8bil to investors in a letter sent to investors on Monday. The US$30bil fund already liquidated a sufficient amount of its holdings by then - and as of March 31, it had loaded up on large-cap tech names.
Consolidation, a healthy pullback - call it what you will. All good things come to an end.
Tech shares have been the market leaders all year, with the sector ETF more than doubling the S&P 500’s year-to-date advance before Friday, prompting Morgan Stanley analyst Michael Wilson to remark that a selloff was “way overdue.” At the end of May, the ratio of the Nasdaq 100 to the Russell 2000 Index had reached levels unseen since the tech bubble was bursting in 2001, suggesting this recent run of outperformance may have run too far.