Return to old school stocks as tech giants take a big hit
INVESTING is cyclical and one year’s big winners have a bad habit of turning into the next year’s losers, and that is exactly what is happening today as the longest stock market bull run in history finally runs out of puff. For a dozen years, global stock markets flew ever higher, thanks to record low interest rates and endless fiscal and monetary stimulus.
US tech stocks such as Amazon, Apple, Netflix, Facebook, Microsoft and Google-owner Alphabet made investors fortunes.
The FTSE 100 floundered as investors shunned boring, old school dividend stocks such as Aviva, BP, GSK and Vodafone.
These strong and solid companies simply could not compete with the tech titans.
Nothing lasts forever though, and this year the US has plunged into a bear market, falling more than 20 per cent as the overvalued tech sector crashed.
Many Brits who held US investment funds in their pension and Stocks and Shares Isa portfolios are feeling a lot poorer as a result.
TORRID YEAR
The hugely popular Baillie Gifford American fund fell by just over 50 per cent in the first six months of this year, as did Morgan Stanley US Advantage and T. Rowe Price Global Technology Equity.
Another fund favourite, Scottish Mortgage Investment Trust, plunged 46.90 per cent over the same period.
Investors in these funds have lost half their money although, with luck, these funds should recover over time.
In a major reversal of fortunes, 2022 has been a torrid year for tech growth stocks, said Jason Hollands, managing director of fund platform Bestinvest. “Companies like Amazon and Tesla were stellar performers during more than a decade of ultra-low interest rates and mild inflation. Those days are over, at least for now.”
First, rocketing inflation has driven up the cost of labour, materials and loans, while reducing the value of their future earnings in real terms. Second, as interest rates rise, investors can get a better return from cash and bonds, without taking as much risk.
US stock markets rallied in the summer on hopes that the US Federal Reserve would slow down interest rate hikes, but these proved illfounded as the Fed is still talking tough and a US recession now looms.
“This triggered a renewed rout in growth stocks and the funds investing in them, hurting some of the funds that have proven especially popular with UK investors due to their high returns,” Hollands said.
CURRENCY GAINS
UK investors have one silver lining. The pound has plunged against the US dollar this year, boosting the value of US assets in sterling terms.
“The NYSE FANG+ Index of mega-sized growth stocks like Apple, Amazon, Microsoft and Alphabet has plunged 28 per cent, yet that is a loss of just 16 per cent for UK investors due to currency gains,” Hollands said.
This year’s stock market volatility shows the importance of knowing exactly what your fund is investing in. Nearly half of Baillie Gifford American is invested in just 10 stocks. “When things are going well, this can lead to rip-roaring performance, but this year its largest holding,tesla, has fallen 24 per cent, while another big bet, Moderna, is down 40 per cent and Shopify is down 71 per cent.”
COMEBACK KIDS
Some investors may think that now is a good time to buy back into the tech sector as valuations are much lower, but Hollands urges caution.
“Growth investing will eventually make a comeback, but only after interest rates slow and fall.that day may be some way off.”
While tech stocks stumble the
FTSE 100 has barely fallen this year.
London-listed oil giants BP and Shell have profited from rising energy prices, while the index is full of dividend stocks that are back in vogue. For much of the last 50 years, the strongest returns have come from undervalued, solid companies paying steady dividends, Hollands said.
Now could be a good time to invest in them. “The easiest way is through funds such as TB Evenlode Global Income, Columbia Threadneedle UK Equity Income and the Temple Bar Investment Trust.”
‘Fallen star funds may take time to recover, but you should think twice before selling them quickly’
SPREAD STRATEGY
Fallen star tech funds may take time to recover, but you should think twice before selling them quickly as a knee-jerk reaction.
Tech is not the only sector struggling this year, said Kelly Prior, investment manager in the multimanager people team at Columbia Threadneedle Investments. “The only hiding place this year has been cash.”
Nick Wood, head of fund research at investment management firm Quilter Cheviot, points out that only 6 per cent of all funds listed by the Investment Association managed to register a positive return in sterling terms in the first half of this year.
The energy sector has done best, with funds like Schroder ISF Global Energy and TB Guinness Global Energy up more than 30 per cent.
The best strategy is to invest in a spread of funds covering different sectors and countries, and lower-risk assets like cash and bonds.that way your portfolio should keep its cool, whatever investment style is in vogue.