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Bubble or boom time for tech: top managers clash over crash fears

Bubble or boom time for tech: top managers clash over crash fears

Are we facing a second tech bubble in 15 years? A growing number of managers and markets watchers are convinced that this is the case.

Pricey stock valuations, record high levels of margin debt and a near record number of money-losing companies going public have made some investors nervous.

Leading investors, such as American hedge fund manager David Einhorn, have suggested there is clear consensus that tech stocks are in bubble territory. With that in mind, Citywire Global canvassed equity and tech investors whether a bubble is forming and how to play it?

Stick to the secular

Threadneedle's head of global equities, William Davies, believes there is some concern at play but only for those with a strong focus on cyclically-driven stocks.

We continue to believe that technology growth stocks within our portfolio  offer superior risk/reward opportunities. However we closely monitor fundamentals and  prefer companies on attractive valuations such as eBay to Amazon. Similarly we own Facebook but not Twitter. 

One of the standout characteristics of these stocks is that they can grow strongly without the reliance on a cyclical upturn in the economy that industrials or banks  need to perform well.

The secular growth of internet use supports the growth of on-line retail and electronic payments, while the broader retail sector needs stronger employment and improving consumer sentiment for growth to improve.

Hype vs. reality

Citywire AA-rated manager Anders-Tandberg Johansen of DNB says the sector is broadly healthy but 'high flying' parts of the market are best left alone as they are likely to face problems.

Although a small number of internet stocks are in a 'bubble territory', we would not characterize the tech sector as a bubble – far from it. The broad tech sector has not even outperformed the general market.

We avoid taking part in the high flying sub sector plays of the internet universe such as for example social media, 3D printing and partially also cloud computing and are, nevertheless, reasonably happy with the absolute and relative returns for the fund and will not change our GARP strategy.

The technology sector is better positioned with moderate valuations. Plus, it grows faster than the market with the sub sector IT growing its EPS by probably 14%. While individual Internet shares break into new fields and see their prices skyrocket, the giants of the sector, such as Google, Apple and Samsung, are available at knock-down prices.

This heterogeneous environment, leading in some cases to contrary trends, creates an attractive equity universe for long-short approaches, where numerous winners are set against equally large numbers of losers.

We continue to apply a classical, fundamentals-based stock-picking approach, with little regard to short-term trends and hype. We still think that the quality of both the management and the balance sheet of companies matters. This is particularly necessary in a sector characterised by enormous innovative power and dynamism, which not only knows winners but also a great many losers.

No tech wreck 2.0

Lombard Odier IM's Bolko Hohaus is vehement there is no chance the market will enter bubble territory, although there are price considerations to take into account.

We do not see the current sell-off as a repeat of 2000. There are, however, some areas in the technology sector which are ahead of themselves in terms of valuation. The sector’s P/E ratio is in line with the overall market despite better growth prospects. We have to be careful with how we use valuation metrics, as only using traditional P/E measures to value technology stocks can be misleading.

A stock like Apple may be very expensive on long-term earnings power despite a cheap P/E of 13 for the current year. A company like Priceline, which is one of the best long-term performers in the S&P 500,  was a buying opportunity when the P/E was above 100, at a time when the company invested for growth instead of cashing in too early.

We try to avoid that part of the stock market which is highly priced but trying to use this sell off to selectively build positions. We are underweight the US due to valuation concerns and overweight Europe and Asia.

No bubble, no trouble

Citywire AA-rated manager Mark Hawtin is staunchly defiant of a problem arising. In the latest update for his GAM Star Technology fund, Hawtin said tech needs to be viewed in the context of the wider market.

We strongly refute this new tech argument. Technology as a broad sector is no more overvalued than the broader market. We agree that there are certain parts of the market that have become frothy and overvalued and we have exited positions we had in these names.

In many cases we were never able to create a sensible buying case on valuation in the first place, so have not owned many of them. There are plenty of exciting ways to invest in the key themes that we like without compromising our discipline on valuation, and so we still see plenty of opportunity for the sector this year.

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