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WeekWatch – ‘Big tech stocks are some of the few winners of COVID-19’ September 2020

WeekWatch – ‘Big tech stocks are some of the few winners of COVID-19’ September 2020

The share prices of big US technology companies ended their record-breaking run last week. On Thursday, the Nasdaq stock index, which is heavy with US tech companies, dropped almost 5% after months of remarkable gains – and fell further on Friday.

The sharp reversal had a knock-on effect on markets around the world. Stock indices in Australia, Hong Kong and China all dropped on Friday. European stocks also slumped, with the STOXX Europe 600 Index falling almost 2% for the week, despite strong performances from some European banking stocks.

Big tech stocks are some of the few winners of COVID-19. Large technology companies have enjoyed a surge in their share prices in recent months, reporting strong earnings while traditional businesses
are still struggling. This is partly due to how they are benefiting from new working patterns and changing consumer behaviour brought about by the pandemic.

Even after last week’s losses, US share prices are still higher than they were before the pandemic took hold. As markets closed on Friday, the S&P 500 remained over 5% higher than it was at the start of 2020, and almost 35% higher than at its lowest point in the year, during the height of COVID-19 infection rates in the US.

But last week’s fall sharpened questions that investors have been asking themselves recently: are the increasingly high valuations of the COVID-19 technology winners a cause for concern? And does last
week’s sell-off signal the start of a market correction?

Although the reversal might bring back memories of the dotcom bubble bursting 20 years ago, there are several reasons why the comparison isn’t helpful.

The first is that the sell-off in US tech firms hasn’t spread to other assets, like bonds and currencies, which held up relatively well last week. The second is that the fall hasn’t been triggered by a market
event; as happened in March this year when countries around the world began lockdowns in order to halt the spread of the virus. And finally, large technology companies are generating strong profits.

“While this correction may have further to run, and we continue to think that tech stocks will fare less well than most other sectors as the economic recovery continues, we don’t expect that a collapse in tech stocks will drag the entire market down for an extended period in the way that it did in 2000–02,” suggested Capital Economics.

While COVID-19 is putting plenty of pressure on share prices, there are also signs of encouragement, believes Mark Dowding of BlueBay Asset Management, which co-manages the St. James’s Place
Strategic Income fund.

“From one perspective, markets look rosy, anchored by low borrowing costs, a steady recovery in some of the worst-hit sectors and just in need of some natural consolidation after a strong run. However, you could equally argue that the data points towards a mixed picture – economic divergence between sectors and countries is increasing and until there is a vaccine, the threat of new local lockdowns lingers.”

One piece of good news last week came in the form of US jobs data, which showed that first-time claims for unemployment benefits had dropped to their lowest level since mid-March.

While COVID-19 will continue to make markets volatile in the coming weeks and months, the upcoming US election will be another source of ups and downs. Last week, an index that tracks investor expectations of volatility pointed towards an expected spike around the date of the election. As the race for the White House becomes more combative, and as recent polls show that the competition is tightening, investors are bracing themselves for a choppy autumn.

Meanwhile, this week marks the renewal of trade talks between the UK and the EU. With time running out to reach an agreement, UK spokespeople have been re-signalling their willingness to accept a ‘no
deal’ outcome.

Last week’s events were certainly dramatic. But they also highlight the importance of two tried-and tested investment principles. Firstly, investors need to focus on their long-term goals and not get discouraged by short-term swings in the market.

And secondly, investing across a wide range of assets is the best way of ensuring that your investments aren’t tied too tightly to the performance of one specific company or sector. A sharp drop in a company’s share price is alarming if you have only invested in a handful of areas, but investors who are spread across a range of investments will be better insulated from such market movements.

 

BlueBay is a fund manager for St. James’s Place.

The information contained is correct as at the date of the article. The information contained does not constitute investment advice and is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Where the opinions of third parties are offered, these may not necessarily reflect those of St. James’s Place.

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