High tech shake-out may have further to run

If ever there was a predictable selloff in markets, one was surely due in the sky-high US technology sector. After further stupendous gains during the coronavirus pandemic as businesses moved permanently online, now comes a reversal. Last Thursday saw heavy falls, with the biggest one-day declines since June.

Shares in Apple fell 7 per cent, while Facebook and Amazon slid by more than 6 per cent. Google parent Alphabet and Microsoft both fell at least 4 per cent. Zoom, the video conferencing company whose shares were up 400 per cent before the fall, lost another 4 per cent.

Here at home, a prominent casualty was Scottish Mortgage Investment Trust, its stellar share price performance highlighted here only last week. Its stock market capitalisation makes it Scotland’s biggest company by virtue of its concentration on high tech stocks with electric car maker Tesla by far its biggest holding.

The SMIT share price has risen by 71.8 per cent in the past six months, by 138 per cent over three years and by just over 300 per cent in five years. Just five successful stock selections account for more than 30 per cent of its performance for the last five years.

I wrote that of increasing concern to the trust’s investors is how long can its stunning performance continue. “Already there are warnings that SMIT is riding a highly overvalued tech bubble – similar to the dot.com bubble of the late 1990s - and will succumb to a sharp and severe correction”.

So are we seeing a short, sharp correction – or the start of a broad, prolonged slide across equity markets? Profit-taking is cited as the chief culprit. But that being so, there could be more of this to go. The share prices of all the companies still remain sharply up for the year and before Thursday the S&P 500 had been up in nine of the last 10 trading sessions.

The sector’s rocketing share performance has reportedly been fuelled by a $50 billion bet on the sector by Japan’s Softbank. According to the Wall Street Journal, this huge buying spree helped drive tech stocks and stock markets to new highs. And the unwinding of those trades may have contributed to the dramatic selloff.

By the close of play on Friday a tentative rally looked to have set in. The S&P 500 fell 3 per cent at the low point on Friday but ended down 0.8 per cent, and the Dow Jones Industrial Average, which had fallen 850 points, ended down 0.56 per cent. The tech-heavy Nasdaq Composite retreated 13 per cent after regaining morning losses of 5 per cent. Here in the UK, the FTSE100 Index ended 51.78 lower on the day at 5,799.08, having been as high as 6,280 on 12 August.

Much now depends on the course of the pandemic here and overseas, and the ability of economies to recover from the massive disruption it has wrought. One encouraging sign is the fall in US unemployment – companies added another 1.4 million jobs in August and the unemployment rate fell to 8.4 per cent

- the first time it has dipped below 10 per cent since the pandemic hit the economy.

But a long uphill climb now lies ahead. And the persistence of the virus, with continuing local lockdowns and social isolation regimes, continue to bear down heavily on the business and household sectors. However, the longer the pandemic persists, the greater the incentive for businesses large and small to move online, thus giving further impetus to information technology and ever more sophisticated digital communication. The full extent of the high-tech sector advance may have yet to be felt.

SMIT sells down Tesla

News that Scottish Mortgage Investment Trust has been selling down its huge stake in soar away Tesla might have suggested that the managers had deemed that the company had gone “ex growth”. Not a bit of it.

Managers Baillie Gifford have been forced to trim its stake in the electric vehicle company after a share price rally pushed its holding past concentration thresholds.

SMIT has been a long-standing supporter of Elon Musk’s Tesla but has been forced to cut back its holding following a rally that has seen the shares rise around 434 per cent this year, taking the company to a market value of around $440 billion.

The combined stake Baillie Gifford holds in Tesla across all its funds and investment trusts has been reduced from 7.6 per cent to 4.25 per cent to ensure no portfolio becomes too concentrated in one stock.

Tesla is a top holding across a number of the Baillie Gifford portfolios, most famously in the flagship Scottish Mortgage Trust, where it is the biggest position at 13.4 per cent of the portfolio as of 31 July.

The electric vehicle company is also the top holding in the £593 mUS Growth trust at 9.8 per cent and Edinburgh Worldwide at 5.3 per cent.

Within Baillie Gifford’s open-ended portfolios, there are seven funds that hold Tesla in their top 10. Open-ended funds are barred from holding more than 10% in an individual stock, though such restrictions do not apply to investment trusts.

Manager James Anderson said ‘ substantial increase’ in the share price meant ‘we needed to reduce our holding in order to reflect concentration guidelines which restrict the weight of a single stock in clients’ portfolios’.