Quick view: Tech stocks sell-off driven by exuberance for AI, not fundamentals
Recent volatility in tech stocks was driven mainly by other factors, not stock fundamentals. Opportunities emerge for active managers when there are price dislocations, according to Portfolio Manager, Richard Clode.
2 minute watch
Key takeaways:
- The recent sell-off in tech stocks was unsurprising given the strong first half, but the ferocity of the moves was exacerbated by the rapid pricing in of a US recession and a huge amount of leverage that investors took on to access AI opportunities.
- The fundamentals of many technology companies remain strong. Market volatility provides opportunities for active managers to take advantage of price dislocations.
- The team’s outlook for tech remains very positive especially given that we are only in the early stages of capturing the potential of generative AI.
Balance sheet: an indicator of a company’s financial strength. The balance sheet is a financial statement that summarises a company’s assets, liabilities and shareholders’ equity at a particular point in time. Each segment gives investors an idea as to what the company owns and owes, as well as the amount invested by shareholders.
Stock fundamentals: information that contributes to the financial or economic well-being of a company for example profitability, revenue, assets, liabilities, and growth potential.
Leverage: the use of borrowing to increase exposure to an asset/market. This can be done by borrowing cash and using it to buy an asset, or by using financial instruments such as derivatives to simulate the effect of borrowing for further investment in assets.
Valuations: in the context of the video, applies to share prices and/or metrics used to gauge a company’s performance, financial health and expectations for future earnings, eg. price to earnings (P/E) ratio and return on equity (ROE).
Volatility: the rate and extent at which the price of a portfolio, security or index, moves up and down. If the price swings up and down with large movements, it has high volatility. If the price moves more slowly and to a lesser extent, it has lower volatility. The higher the volatility the higher the risk of the investment.
JHI
We would expect a bit of market digestion after such strong returns in the first half we saw something very similar last summer, but I think what’s exacerbated that is the market very rapidly pricing in an increased chance of a recession, rather than a bit of a ‘Goldilocks’ kind of ‘no landing’ scenario that the market was pricing in before. But when we take a step back, we still think that a recession is still pretty unlikely in the United States, and the economy is still adding jobs, and there’s a lot of volatility in that month-for-month number, we’re heading into a rate-cutting cycle and actually when we look at the fundamentals of technology companies, they still remain for the vast majority, very strong. We remain in the early innings of the AI monetisation cycle, and so they continue to invest heavily against that opportunity and we see an acceleration in cloud growth, in online search, and advertising growth, and we have strong balance sheets still as well as earnings power and [technology] valuations have obviously pulled back in many cases, significantly as well.
And the beauty is as active managers as we can take advantage of some of this market volatility, which has been very much exacerbated by a huge amount of leverage that a lot of market participants have taken on to access some of these exciting momentum areas, particularly in the AI space and that has obviously unwound and led to significant downside  volatility, which again we can look to step into where we felt that that’s been dislocated away from fundamentals and that’s what we’ve been doing over the last week.
Taking a step back, we still don’t see a huge amount of change to the forward outlook where we remain very positive on the outlook of the technology sector over the years to come, and we think we’re in the very early innings of being able to capture the opportunities from generative AI. And we’ll look to pick the genuine beneficiaries and winners of those trends that are actually going to deliver the profits and therefore ultimately justify the stock returns that we’ve seen in the sector that we expect to extend through years to come.
2 minute watch
Key takeaways:
- The recent sell-off in tech stocks was unsurprising given the strong first half, but the ferocity of the moves was exacerbated by the rapid pricing in of a US recession and a huge amount of leverage that investors took on to access AI opportunities.
- The fundamentals of many technology companies remain strong. Market volatility provides opportunities for active managers to take advantage of price dislocations.
- The team’s outlook for tech remains very positive especially given that we are only in the early stages of capturing the potential of generative AI.