Equities that had reached new market highs took a tumble after doubt was cast on the efficacy of a potential vaccine for Covid-19. Hundreds of billions of dollars were wiped off values in a three-day rout, led by the tech giants that now dominate the global market.
The coronavirus pandemic has greatly benefited the FAANG grouping – Facebook, Apple, Amazon, Netflix and Google – which have risen in value by up to 70% so far this year. Lockdowns and working from home have led to a huge rise in digital activity, ranging from conference calling and home entertainment to e-commerce and cloud computing.
Apple’s market cap of USD 2 trillion is higher than the GDP of Italy, and also larger than the entire value of the UK’s FTSE 100. The FAANG grouping combined with Microsoft’s market cap has a total value of more than USD 7 trillion, and has accounted for the vast majority of all stock market returns this year.
“I don't think we're in a bubble, but I do think valuations are very high, and there has clearly been a correction this week,” says Michiel Plakman, portfolio manager with the Robeco Global Equities team. “I do think there are fundamental underpinnings to their values, especially since the start of Covid-19, where we've seen a significant shift towards more e-commerce and working from home.”
“The only issue we have here is that we're really front-loading some growth; the growth that might be expected for the next one or two years is really being condensed into a shorter time period. So that may not be sustainable.”
“We are concerned that the levels of growth we're currently seeing in the tech stocks are too easily extrapolated into the future, and that people think the situation will remain as it is once the coronavirus crisis is over. We still have to wait and see.”
“But the world has changed: people are spending much more in terms of e-commerce by having stuff delivered to their homes, and less on the high street, travel, or going out for dinner and staying in hotels, and so on.”
“We're slowly moving to normalization, but getting a workable vaccine is still way off. Even when we get a vaccine, we need to vaccinate hundreds of millions of people to create a safety net. That will take a lot of time. Moving towards normalization will probably take much longer than people think.”
Plakman says a big issue for the tech sector is where future profits will come from; how can you grow when you’re already worth USD 2 trillion?
“A lot of the technology shift will stay,” he says. “We've moved from one PC per household to maybe three or four laptops per household. We're moving to 5G. The question for the technology sector is, has the Covid-19 been an adrenaline shot in the arm, and how can they continue to grow, particularly when regulators are looking closely at what they are doing.”
“They may have to start eating into each other’s businesses, where Amazon starts doing adverts and Alphabet starts selling from warehouses, for example. There may be some overlap over time, and they are all likely to get deeper into streaming media, gaming or payments. None of these spaces are new, and any new markets will need to be very large to move the needle.”
As the world recovery from the Covid-19 fallout begins to take hold, the wider market is likely to see some sort of rotation out of the “nosebleed valuation” tech stocks into the more cyclical companies, says Fabiana Fedeli, Global Head of Fundamental Equities at Robeco.
“Tech stocks were probably being far too richly valued and were due for a pullback, which finally came this week,” she said in an interview with Bloomberg TV. “This is a correction. But I think the key thing for investors is what's going to come next.”
“I feel that this is the start of a rotation of the market into more cyclical stocks. We got to nosebleed valuations in tech stocks that were definitely discounting the growth rates that we saw during Covid-19 going forward. In reality, once you start looking at the possibilities of earnings growth in the second and third quarter of next year, the comparisons become much more difficult, and we will see growth rates coming down.”
“There are now a lot of more cyclical stocks out there which are benefiting from an improvement in the economic activity pick-up, and these have been underperforming significantly until now. I think investors are going to start picking more from those stocks.”
“At Robeco we have started to put some of the money to work in the more cyclical stocks, particularly in industrials, and in specialty materials and consumer staples in Europe. We particularly like the European markets because obviously they have lagged until now. There are a lot of cyclicals where valuations really discount all the ills of the world.”
“Last but not least, we're increasing the sustainability profile of our strategies, and targeting more sustainable stocks. Stocks with a strong sustainability profile are likely to do far better in these markets.”