Bubbles are ‘simultaneously popping’ in risky investments

Technology shares are falling but is a switch to ‘value’ stocks wise, asks Lauren Almeida

The stock market’s biggest bubbles have got closer to bursting this week as the prospect of interest rate rises casts a shadow over the most lucrative investments of the past decade.

The Nasdaq 100, an index that tracks the shares of large US technology stocks, has dropped by 4pc this year. Looming higher rates have spooked “growth” investors – who back businesses that are expanding quickly and whose share prices have tended to follow suit. This is because higher rates decrease the value of future profits, making companies that promise rewards down the line less appealing.

Such anxiety has rippled through to DIY investors. Scottish Mortgage, Britain’s largest investment trust, which has a penchant for tech companies, has lost 20pc since early November and now trades at a modest – and very rare – 1.8pc discount to the value of its investments. Meanwhile Bitcoin, the world’s most popular cryptocurrency, has shed 13pc in 2022 and now hovers close to the $44,000 mark.

Strategists at Bank of America, an investment bank, said the falls proved that bubbles had “simultaneously popped” in risky investments. This could play into the hands of “value” investors – those who own shares that appear to trade below the intrinsic value of the company.

However, there have been many false dawns for the so-called “rotation” from growth to value. Similar moves were recorded at the beginning of 2021 and some professionals have predicted the rotation every year of the past decade.

Terry Smith, star manager of the £ 29bn Fundsmith Equity fund, said he was not convinced 2022 would be any different. In a letter to investors this week, he warned value seekers that even if markets changed direction it would not mean that stocks trading cheaply were good companies. He said: “Even if you identify a truly cheap value stock and time the rotation correctly, this will not transform it into a good long-term investment.”

However, DIY investors still have to consider their next moves. Too much money dedicated to one investment style can be harmful for portfolios.

Michael Seidenberg, co- manager of the £1bn Allianz Technology Trust, said higher interest rates might make him more hesitant to invest in stocks that were not yet profitable. He said: “The cost of borrowing will go up for these companies, so they will have to change their spending habits. If they try to pass this on to customers, they could become even less profitable.”

Barry Norris, who runs the Argonaut Absolute Return fund, said higher interest rates meant growth investing was approaching the end of its cycle.

“Such investors often do not pay attention to how expensive a stock is,” he said. “These are the companies that are most vulnerable to a fall at the moment.” He added that “reopening stocks” in leisure and hospitality were an alluring opportunity.

Chris Metcalfe of the wealth manager Iboss advised savers to own a mix of growth and value investments. “Assuming one style is going to work forever is risky. We cannot expect market conditions to remain the same as they have for the past 10 years,” he said. “If I had to make just one bet, I would back the

FTSE 100. This may sound like ‘home bias’, but the British market has got lots of oil and banking companies that will do well with higher rates.”

Tom Sparke of the wealth manager GDIM agreed. He backed the £ 1bn Artemis UK Select fund, which has returned 60pc in the past five years. “The manager, Ed Legget, picks out the best value stocks,” he said. He also tipped the Man GLG Undervalued Assets fund, which invests primarily in British companies such as BP and Barclays.

Mr Metcalfe also recommended Janus Henderson European Focus, which has gained 59pc in the past five years, and M&G North American Value, for savers who wanted cheaper stocks in the US.

However, Mr Sparke said any market fall from increasing rates could also present a buying opportunity for growth businesses.

“Soon investors will start to think about falling economic growth and will gravitate back towards businesses that offer higher than average profits. You can find them in the tech sector, even if they do look expensive,” he said, recommending companies such as ASML, the Dutch semiconductor equipment manufacturer. “This is a business that is embedded in supply chains across the world, and that dominance will not be challenged by this change in the economic environment.”

Mr Seidenberg said ultimately growth tech stocks would continue to thrive. “They are solving difficult problems for their customers. You have to do digital transformation, regardless of the economic environment,” he added.

‘If I had to make just one bet, I would back British stocks’