Are leading tech stocks in for a stock shock?

As the world’s stock markets prepare for a winter of uncertainty, one sector in particular might be about to feel the chill.

After a stunning year in 2020, technology stocks have just endured their worst month since the Covid crash, with tech-heavy American index the Nasdaq 100 falling 5.91 per cent in September. 

Amazon, Apple and Alphabet (previously known as Google) have lost 3.2 per cent, 7.28 per cent and 2.24 per cent since mid-September.

And social media giant Facebook has been left nursing a $100 million loss in value after a barrage of bad headlines. 

Meanwhile, Wall Street’s best-known tech fund — ARK Innovation — has fallen 26 per cent since February as big investors fear a wider change in fortune. 

Tech slump: Amazon, Apple and Alphabet (previously known as Google) have lost 3.2 per cent , 7.28 per cent and 2.24 per cent since mid-September

Legendary investor Michael Burry (whose bet against the U.S. sub-prime mortgage market was immortalised in the 2015 blockbuster The Big Short) is now betting against the fund.

So is big tech facing a squeeze? And will it affect your portfolio?

First, it’s worth noting that a slowing of momentum for tech stocks wasn’t unexpected. Thanks to worldwide lockdowns, 2020 became a boom year for internet firms, with the Nasdaq 100 growing by nearly 47 per cent in one year. 

Whether these dizzying valuations can hold up has been a topic of hot debate, with many predicting that a rebalancing towards ‘offline’ stocks is inevitable.

‘A wall of cash hit the stock market when markets fell 18 months ago and a lot of it has been directed at fashionable areas,’ says Rob Morgan, chief analyst with the investment platform Charles Stanley.

‘We have already seen a big slide in many clean energy stocks, for instance, simply because valuations got detached from reality.’

Indeed, such a realisation seems to have already arrived for certain tech companies. At its high point in October 2020, video conferencing platform Zoom was up 722 per cent in ten months. Its share price has fallen by more than 22 per cent this year, and 51 per cent since its peak.

Meanwhile, the FTSE-listed cryptocurrency miner Argo Blockchain — whose stratospheric rise briefly made it a popular pick for DIY investors — has plummeted by 55 per cent since February.

Beyond these examples, the tech sector is particularly exposed to the now omnipresent threat of inflation. ‘When inflation rises investors want higher returns on their money, which brings asset prices down,’ says Mr Morgan.

On top of that, the valuations of tech companies are often based on expectations of their future profits, and the belief that they can continue to borrow cheaply. 

Should central banks hike rates to keep inflation in check, it could hit profit forecasts — making tech firms less attractive.

Thanks to worldwide lockdowns, 2020 became a boom year for internet companies, with the Nasdaq 100 growing by nearly 47 per cent in one year

But Mr Morgan says that investors should be cautious about drawing sweeping conclusions about the whole tech sector.

He points out that the valuations of some of the largest tech companies — such as Microsoft and Alphabet — are only slightly higher than the U.S. average.

‘The sector as a whole still enjoys big tailwinds, such as more businesses looking to store their data on cloud services,’ he says.

And, of course, the most dramatic moves in prices are typically down to factors affecting that company in particular, as the Facebook example shows. 

The social media firm’s stock price has dropped by almost 13 per cent since September 1 following a series of damaging leaks around its safety practices. Then came a huge server outage.

However, Facebook remains highly profitable and has shaken off similar slumps in the past (including a 20 per cent plunge at the height of a data-sharing scandal in 2018).

Some tech investors also consider short-term volatility to be part of the price for the high returns the industry can provide.

Edinburgh-based Baillie Gifford, one of the UK’s best known tech advocates, defines its philosophy as seeking out those ‘superstar’ companies who can outperform the market. When that works, as happened with the company’s early stakes in Tesla and Facebook, it pays off handsomely.

That should be more than enough, the theory goes, to cover the failed bets.

So how have its funds fared this month? 

Its super-popular Scottish Mortgage Investment Trust has risen by 4.37 per cent over the past month — even as the Nasdaq fell.

The trust had already reduced its holdings in Tesla and Facebook, pivoting towards biotech companies (including vaccine-maker Moderna). 

Longer-term investors have been well rewarded, with £10,000 invested five years ago worth £43,000 now.

The Baillie Gifford American Fund has fared less well, falling 7.9 per cent in a month. Like Scottish Mortgage, though, its longer-term record is enviable — turning £10,000 into £42,000 in five years.

Whether they hold their value will depend, in part, on whether September’s tech slump turns into a full-on correction.

But the events of the last few weeks have already provided a useful refresher course on some of the basic laws of investing.

Those are: always diversify your portfolio; only invest in companies (or funds) you understand; and invest for the long term.

While the U.S. tech industry has performed well (and remains a vital part of any retail portfolio), it’s risky to have more than 15 per cent of your money in one market.

Many investors may be more exposed to the tech sector than they realise, as its runaway performance has made it popular with fund managers. 

If you find you have several funds backing the usual suspects — Amazon, Tesla, Microsoft — it may be worth investing some profits elsewhere.

And finally, as the Zoom boom demonstrates, be extremely cautious about chasing last week’s winners — you might end up on the wrong side of the peak.

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This post first appeared on Dailymail.co.uk