Big tech nervousness prompts calls to diversify
NEW YORK: As a technology-driven rally brings US stock indexes within striking distance of fresh records, concerns that big names are overextended and that new regulation might be coming have some investors diversifying beyond the rally leaders.
The S&P 500’s five biggest companies, Apple Inc, Microsoft Corp, Amazon.com Inc, Alphabet Inc and Facebook Inc now account for 28 per cent of the index’s weighting and have been responsible for 25 per cent of its earnings, Goldman Sachs said earlier this month.
On average, these tech and Internet-driven stocks have gained 49.23 per cent this year, compared to a 7 per cent gain for the S&P 500 — and are up 9.6 per cent on average since September 21, versus 6.6 per cent for the S&P 500.
They are expected to report strong third-quarter earnings in coming weeks, proving their mettle in a year when the coronavirus pandemic fuelled a work-from-home economy while devastating companies linked to sectors like travel, restaurants, and fossil fuels.
Still, some worry that megacap tech companies are exposed to factors that may cut their allure in the months ahead. Being long technology is the most crowded trade of all time, according to a recent Bank of America fund manager survey.
“It’s all about trying not to have all your eggs in one basket,” said Laura Kane, head of Americas thematic investing at UBS Global Wealth Management. “It’s about trimming certain exposures and rotating into something else.”
UBS analysts have recommended diversifying out of mega-cap tech stocks on signs of an economic recovery and climbing valuations. They urge rebalancing into US semiconductors, which are more sensitive to economic recovery, as well as emerging market value stocks and United Kingdom-based equities.
Societe Generale analysts also recently cited a challenging regulatory environment as one reason to diversify out of US tech shares and into Asian ones and European stocks.
Regulatory concerns have heightened following a scathing report here detailing market power abuses by Google, Apple, Amazon and Facebook issued earlier this month by the US House Judiciary Committee’s antitrust panel.
The report has raised concerns that tough new rules and stricter enforcement for big tech companies will follow should Democratic presidential candidate Joe Biden win the White House.
A potential breakthrough in the search for a COVID-19 vaccine could also spur bets on shares of economically sensitive value and cyclical stocks that may benefit from a stronger economic recovery, potentially dimming the appeal of tech, Soc Gen analysts said.