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.
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.
These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.
Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.
The information in this article does not qualify as an investment recommendation.
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Specific risks
- Shares/Units can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
- If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
- The Fund is focused towards particular industries or investment themes and may be heavily impacted by factors such as changes in government regulation, increased price competition, technological advancements and other adverse events.
- This Fund may have a particularly concentrated portfolio relative to its investment universe or other funds in its sector. An adverse event impacting even a small number of holdings could create significant volatility or losses for the Fund.
- The Fund may use derivatives with the aim of reducing risk or managing the portfolio more efficiently. However this introduces other risks, in particular, that a derivative counterparty may not meet its contractual obligations.
- If the Fund holds assets in currencies other than the base currency of the Fund, or you invest in a share/unit class of a different currency to the Fund (unless hedged, i.e. mitigated by taking an offsetting position in a related security), the value of your investment may be impacted by changes in exchange rates.
- When the Fund, or a share/unit class, seeks to mitigate exchange rate movements of a currency relative to the base currency (hedge), the hedging strategy itself may positively or negatively impact the value of the Fund due to differences in short-term interest rates between the currencies.
- Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
- The Fund could lose money if a counterparty with which the Fund trades becomes unwilling or unable to meet its obligations, or as a result of failure or delay in operational processes or the failure of a third party provider.
Specific risks
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.