Steven Russolillo The Wall Street Journal
Tech is back.
The global technology giants at the centre of a steep sell-off in stocks this spring are climbing to new highs propelled by blockbuster earnings and a surge in business spending.
Just a few months ago, investors dumped big positions in tech stocks, wiping out $601 billion (approximately $781 billion Canadian) in market value from the S&P 500 tech sector alone in just three weeks. Their concern: more regulation and consumer scrutiny over data privacy.
Now, the Nasdaq is hitting new highs and the MSCI World Information Technology sector is up 9 per cent this quarter — currently outperforming the wider MSCI World Index by the largest margin since the dot-com era. That’s thanks to better-than-expected first-quarter earnings and signs U.S. companies are spending more on technology.
Facebook Inc. shares traded around record highs this week and Apple Inc. is again within striking distance of becoming the first $1 trillion U.S. company. Chinese e-commerce titan Alibaba Group Holding Ltd. and internet search giant Baidu Inc. have recovered from double-digit percentage declines earlier this year to rise 11 per cent and 19 per cent this quarter respectively. Even Europe’s small technology sector has outperformed the Stoxx Europe 600 by 8 percentage points over that period.
The threat to the sector of increased regulation and a global trade war haven’t completely gone away. But convinced about these companies’ earnings prospects, investors poured $2.3 billion (approximately $2.9 billion Canadian) into tech-sector funds in the week through Wednesday, according to EPFR Global, dwarfing any outflows in February, March or April combined.
“I think the (tech) worries were misplaced,” said Matthew Peron, chief investment officer at City National Rochdale. “We’re in a growth cycle and ultimately I don’t see trade or political dust-ups derailing what is a secular issue.”
Technology stocks contributed 75 per cent of the S&P 500’s return in May, according to Bank of America Merrill Lynch data, and now represent 26 per cent of the index.
Even the stocks at the centre of market worries in March have found new fans.
In mid-March, shares of Facebook fell roughly 18 per cent in just over a week. Investors were concerned that its handling of user data would lead to a steep fall in users and increased regulatory scrutiny that could threaten its advertising-focused business model.
“There was this feeling around data protection that this was the beginning of the end — no one would allow their information to be shared,” said David Older, head of equities at Carmignac, who invested an additional $150 million (approximately $195 million Canadian) into Facebook as it fell on a bet its revenues wouldn’t be affected.
In late April, Facebook’s first-quarter results showed robust numbers for daily active users and advertising revenues. That’s helped its shares climb roughly 26 per cent since their low point in the sell-off.
It wasn’t just Facebook. The S&P 500 tech sector delivered 33.7 per cent earnings growth in the first quarter. That cut the price tag the sector trades on to just 19 times forward earnings, from 20 in January, according to FactSet.
“What do equity investors feel they can really count on now? It’s not trade policy, not the Fed, it’s earnings,” said Dave Donabedian, chief investment officer at CIBC Atlantic Trust Private Wealth Management, who owns several companies in the tech sector.
Just 3.5 per cent of analysts now hold a sell rating on the S&P 500 tech sector, the lowest since 2013, according to FactSet.
Investors have also brushed aside other regulatory concerns. Many were worried that GDPR — the European Union’s new privacy law — would hurt profits at large technology companies by restricting access to user data and adding to compliance expenses.
So far, for large companies like Facebook and Google, “there seems to be minimal impact,” said Jason Helfstein, internet analyst at Oppenheimer & Co. “If anything, it benefited them on a relative basis,” he said, as customers appear more willing to consent to share data with companies with stronger brand power.
At the same time as regulatory concerns fade, tech companies look set to benefit from U.S. tax cuts.
American companies are using those savings to buy new technology products, according to multiple surveys of chief financial officers’ spending intentions.
Michael Kelly, global head of multi-asset at PineBridge Investments, said he has recently built a basket of roughly 100 global stocks that he believes will benefit from a surge in business spending, including companies that sell robotics and artificial intelligence.
“Enabling technologies are on everybody’s wish list for Christmas,” he said.
Recent gains by Alibaba and Tencent Holdings Ltd., China’s two largest tech companies, have exceeded some U.S. rivals. Both now have market capitalizations above $500 billion (approximately $649 billion Canadian), placing them among the world’s top 10 most valuable companies.
Tencent — the world’s largest videogame publisher by revenue — is still 13 per cent below its record high, a dynamic that investors say is appealing.
“We believe Tencent has one of the most solid business models in China if not Asia overall,” said Felix Lam, senior portfolio manager for Asia-Pacific equities at BNP Paribas Asset Management in Hong Kong.
Even in Europe, where technology companies make up a smaller part of the market, the sector has been a recent leader. Software company Dassault Systèmes SE is up 35 per cent so far this year and Swiss-based Logitech International SA is up 32 per cent.
To be sure, concerns about regulation and trade are likely to hang over the sector, with tech shares falling Thursday amid reports members of Congress have begun scrutinizing Google’s relationship with China’s Huawei Technologies Co.
Hardware companies and those heavily reliant on revenues from both the U.S. and China could also be vulnerable to trade tensions, some investors say.
Meanwhile, some of the tax-related changes to earnings won’t deliver the same boost after 2018, analysts say.
The sector is “having a sugar high here from fiscal stimulus plus tax cuts,” said Carmignac’s Mr. Older. “The trends are real and will continue, but you probably have one to two quarters of this type of euphoria before things start to normalize,” he said.
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