Markets stocks

Amid ‘Shades’ Of Dot-Com Bubble, It’s Time To Switch Out Of Big US Tech, One Bank Says

“Long US Tech” was identified as the most crowded trade in the world for the sixth month in a row (and the ninth in 12), in BofA’s latest global fund manager survey.

And yet, “tech bubble” ranked just third among the biggest “tail risks,” behind the virus and the US election.

Asked whether tech will continue to shoulder the burden of equity market leadership next year, 50% of respondents to the same poll said “yes,” while 43% said “no.”

This touches on one of the most vexing quandaries for market participants — namely, the prospect that even if a pro-cyclical rotation (catalyzed, for example, by reflationary fiscal policies) is desirable, and even if we’d all like to see a “healthier,” broader rally, one can’t help but speculate that due to how narrow leadership has become and the capacity for big-cap tech to generate revenue and profit growth in an environment where most other firms cannot, a changing of the guard isn’t just unlikely, it may be undesirable and even impossible.

But if you ask SocGen, it’s time to “diversify away” from big-cap US tech. “The sector has become more volatile,” the bank’s Alain Bokobza wrote, in a note dated Wednesday.

Indeed it has. The last two months have been defined by drama in tech land, where the knock-on effects of a monthslong retail options mania and a series of large trades by SoftBank, helped drive shares inexorably higher in an August melt-up that ultimately ended in a correction early last month. Over the past week, these dynamics have made a comeback of sorts.

In a separate note, SocGen’s equities derivatives team writes that while collapsing realized correlations (tied, for instance, to huge outperformance from tech versus laggards) suppressed index-level volatility in the lead-up to the September tech correction, there were (and still are) sings of froth.

“While the volatility contribution of [information technology and communication services] to the overall S&P 500 volatility remains below the astonishing c.70% levels reached during the tech bubble, we have seen shades of comparable contributions in August this year,” the bank’s Vincent Cassot, Jitesh Kumar, and Gaurav Tiwari wrote. Specifically, the monthly volatility contribution from those two sectors was ~64% in August.

The bank notes that low realized correlations between stocks (e.g., in the event big tech continues to outperform by a wide margin) could well keep index volatility compressed.

Cassot, Kumar, and Tiwari also write that earnings uncertainty (based on analysts’ estimates) for US tech is much lower now than it was during the dot-com years, for obvious reasons. In fact, earnings uncertainty for tech is just half of what it is for the broader index.

So, how does one explain higher Nasdaq 100 volatility? Well, as SocGen writes, this needs to be seen in “the context of volatility originating in the right tails – earnings uncertainty very rarely gets repriced due to risks to the upside [so] this NDX-SPX volatility spread may remain elevated until the enthusiasm for technology stocks runs its course.”

Further, the bank notes that volatility tends to be elevated both in very cheap markets and in very expensive markets. Right now, we’re in the latter.

Finally, most believe that the chances of tighter regulation on America’s tech behemoths would be higher under a Democratic administration and Congress.

I suppose what I would gently note is that Trump has been fairly aggressive in going after Amazon, Google, and Facebook. While US authorities and GOP lawmakers are ostensibly interested in the antitrust issue, Trump and some of his staunchest allies are also motivated by what they claim is “anti-conservative” bias. (In reality, it’s anti-far-right/alt-right bias, which is something entirely different.)

While regulatory risks may well rise in a Democratic sweep scenario, at least the motivation would be primarily centered around legitimate antitrust concerns and not some petty grudge tied to purported “shadow bans” or unfavorable search results.

In any event, SocGen’s Bokobza has a straightforward take on it all. “This heightened volatility has materialized at a time when two metrics threaten to undermine the sector’s remarkable outperformance,” he writes, citing “an improving economic outlook and a more challenging regulatory framework, the latter being exacerbated by the prospect of a Biden presidency.”

For the bank’s asset allocation team, that means it’s time to look for growth somewhere else, with one candidate being Asia Tech.

That comes with a few caveats, though, the most important of which is the downside from “political risk,” where that means “the tariff war between the US and China has morphed into a technological face-off.”


 

5 comments on “Amid ‘Shades’ Of Dot-Com Bubble, It’s Time To Switch Out Of Big US Tech, One Bank Says

  1. runamok says:

    Regulators need to start with Facebook and end with Facebook. Carve it up, chew on it, and spit it out. What is the probability that FB will be around in 20 years anyways?

    It”s a company that doesn’t contribute much to making the nation the least bit more productive. (I’m taking about productivity of land, labor, and capital, not one’s personal time wasted looking for high school sweethearts.) Any readers who have been thinking about deleting their FB accounts, go for it. It’s liberating.

    As for the rest, they are a competitive advantage for America right now. We need them. I can understand some regulation, but breaking any of them up is probably not in our best interest.

    Enough FB hate. When the COVID vaccine is available for everybody later this month (before the election, right?), BIg Tech will naturally decrease in valuation, avoiding a crash, as the euphoria shifts to long VLUE.

  2. babeinwoods says:

    Look at ICLN or TAN or PBW vs QQQ for the past year or two.
    Clean energy is either a crazier bubble than Tech ever was or on its way to being the new Big Tech.

  3. babeinwoods says:

    And by the way climate change is real so factor that in.

    • Canuck says:

      More than fourty (sorry for the Canadian spelling but you guys still pretend to call it English) years ago the mountain pine beetle started to spread into Canada due to the lack of sufficiently cold winters. People didn’t understand what was happening. Some still don’t.

      • Nobody says:

        Bringing it home: Jeff Orlosky who directed Chasing Ice and Chasing Coral (both award winning climate change documentaries) directed the Social Dilemma because he couldn’t figure out why no one was paying attention to climate change.The Social Dilemma is a simplistic look at some of the extremely sophisticated AI strategies involved in the attention economy where micro targeting of not only advertising but seductive, incremental influencing is for sale to commercial and political entities. FB is the master of this and the threat is unguarded. We have missile defense systems, yet almost nothing to protect us from say, the armies of sophisticated,disruptive and polarizing Russian hackers (whose existence is well documented by the intelligence community). Climate change denial, or more prominently, seeds of doubt about facts, are also promoted by the unscrupulous who benefit from limited regulation.

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