Has the tech superbubble burst and is the party over?

US stocks have tumbled following the news of an interest rate hike. By

Investors in cryptocurrencies, highgrowth stocks, Nasdaq or the ARK Innovation exchange-traded fund (ETF) – the poster child for innovative investing – are reeling since the recent rout on US equity markets.

Bitcoin, the world’s largest cryptocurrency, is trading 20% lower this year and 42% lower than last November; Nasdaq, home to Apple, Microsoft, Amazon and Meta (Facebook) is 11% down year to date; and the ARK Innovation ETF, renowned for bold punts on the riskiest, most glamorous players in tech, pharma and crypto, is down 25% this year.

Companies within the ARK fund include Tesla (down 23.5% year to date), retail trading platform Robinhood (down 30% year to date), crypto information provider Coinbase (down 65.4%), telemedicine and virtual healthcare company Teladoc Health (down 25%) and digital payments company Block (down 48%).

In comparison, staid consumer staples like ABI, British American Tobacco, Heineken, Unilever, Colgate and Procter & Gamble have maintained value as consumers have opted for the relative safety of stocks with predictable dividends and growth.

In fact, the story of 2022 is best illustrated by a comparison between ARK’s Innovation ETF and Berkshire Hathaway, Warren Buffett’s $680-billion conglomerate, which is invested in less sexy industries such as energy, utilities, insurance, housing and railroads: since the beginning of 2021, ARK is down 54% whereas Berkshire is up 30% or more.

What had investors running for safety were well-telegraphed signals by the US Federal Reserve that it would begin hiking interest rates this year and easing back on its bond-buying programme. Volatility was intense ahead of the Fed’s two-day policy meeting on 25 and 26 January. At the meeting Fed Chair Jerome Powell left rates unchanged at near-zero – where they have been set since March 2020 – but indicated that higher borrowing costs would come “soon”.

Geopolitical tensions principally between Russia and Ukraine but also China and Taiwan are also unnerving investors. However, Old Mutual portfolio manager Peter Brooke believes these concerns pale in comparison to other challenges. “This conflict has the potential to spill over into energy markets, but it’s largely localised and is less risky than US interest rates, which affect the global cost of capital.

“Investors were watching for comments on three key areas in particular, including interest rates, the tapering of asset purchases and a reduction of the central bank’s balance sheet,” he says. Higher interest rates may help to curb inflation, but they also hurt equities, in particular high-growth stocks, whose valuations are based on future, not current, profits.

“Investors worry about this. They worry that the Fed could be making a mistake, as there are fears that the economy is losing (or could lose) some momentum or that earnings season may not be perceived as positively as it has been in the past. A policy mistake at this point could be calamitous,” says Pieter Hundersmarck, global multi-asset portfolio manager at Flagship Asset Management.

“For the last decade, the market has been able to count on the Fed to support growth. But with the economy at full employment and inflation being driven by rising costs, the Fed may be less inclined to halt its plans.”

Without bending over for the market, Powell did his best to allay investor fears. Rates will be raised in March – for the first time since the coronavirus pandemic struck the US, “assuming that the conditions are appropriate,” he said. The message was clear: the economy no longer needs sustained monetary policy support. However, he refused to be drawn on how many increases could be expected this year, noting that the higher inflation, higher growth and stronger economy would have policy implications.

What does this mean for investors?

There is no doubt that investors are spooked by the shift in policy, with many predicting that a bear market – triggered by a 20% drop in the market – is imminent.

The question to ask is: is the world changing? “The answer is yes. Rates are going up and they will keep going up,” says Brooke.

But that doesn’t necessarily mean cut and run for the hills. “The sentiment is risk-off, so avoid tech stocks with no profit history and ‘huge potential’,” he says. Instead, look for companies with dividends, profits and strong balance sheets, and if these happen to be tech stocks – the likes of Meta or Apple – so much the better, he says.

Paul Theron, CEO of Vestact, is sanguine about recent events. “We haven’t had a correction for some time, but they are not uncommon,” he said, noting that corrections had occurred in 30 of the past 40 years.

“There is a lot of hot money and automated money in US markets, which means that the selloff starts to feed on itself. Next thing people start looking for reasons to explain it.”

In this case, the reason is the change in Federal Reserve policy. But history shows that rate-hiking cycles do not necessarily correlate with poor performance in markets. “It is impossible to predict what could happen and all these market opinions are not worth two beans.”

His advice to clients is to continue to accumulate quality counters, including tech, and add to current positions. This is not the same as “buying the dip”, which has worked well for investors over the past eight years. “We are not traders. But we don’t think profits are at risk, and we do think that most of the things that people worry about don’t happen.”