NOT surprisingly, technology shares – or tech stocks as they are colloquially called – have been all the rage in recent months, if not years. Two decades ago a bubble expanded and burst leaving many embarrassed at having been caught up in the mania. What appeared to be a miracle at the time seemed more like a mirage in the aftermath.
With the benefit of hindsight it is easy to be judgemental but it should be remembered that some portfolio managers had harvested and re-cycled profits along the way. It was certainly the highlight of my career in terms of active trading and sheer excitement. The belief that technology was the gateway to the future also coincided with the onset of 2000 with all the optimism that entailed.
The subsequent crash was brutal and took two-and-a-half years to find a base with a peak-to-trough decline of 77% on the Nasdaq index; the most commonly referenced technology benchmark in America. Indeed, the lows were tested once more in 2009, making it a lost decade for returns on these investments. As ever the mainstay of capitalism is creative destruction and from the ashes emerged today’s leaders without whom life would have been a struggle; especially in recent months.
Technology has become so all-consuming that the big five names (Facebook, Amazon, Apple, Netflix, Google/Alphabet) now account for a record 22% of the top 500 US companies by stock market value. We have not seen such extremes since 2000 when the top five firms made up nearly 19% of the index. Back then share prices were based on theory and supposition but now they are grounded on real earnings. One must of course be mindful of the mantra ‘this time it’s different’ but we should also remember that technology is a relentless source of innovation that sets human beings apart from other species.
We were fortunate in creating a technology portfolio in 2010 as the market began a decade-long rally. Rather than promoting the high returns irresponsibly we are at pains to point out cyclical corrections that see losses between 10% and 15% every other year; such is the nature of high-risk investing. Paradoxically, tech stocks proved to be relatively resilient during the pandemic as the shares fell less than other areas of the market and went on to rally strongly.
Investors are drawn to high returns like moths to flame and it is our job as advisers to temper expectations and highlight the potential downside. The lesson from history is that every boom or bubble sees opportunistic promotions that are often fraudulent or fantastical at best. This was true for the South Sea Bubble in 1720 and may well be the case for technology equivalents in 2020; the theme may have changed over the centuries but human behaviour remains unchanged.
There are other trends at play below the surface. Money printing in various guises will be coming to our shores soon because of our ties to sterling. This currency union was established in 1921 as a replacement for the Guernsey double, which had been dragged down by the deterioration of the French franc following the First World War. While the link to the pound may have brought benefits it now means Guernsey is not immune from the devaluation of mainstream currencies.
In this environment those who prudently saved cash on deposit will be punished while those who borrowed will be rewarded. This is because inflation whittles away debt over time just as it scythes purchasing power in equal measure. It applies as much to States finances as it does to individuals and is a reflection of the modern topsy-turvy world.
In a race to the bottom the principal safety net for the loss of our currency’s value is investing in some kind of real asset, be it equity (shares), property or precious metals. Markets have already sensed the whiff of money printing so the rush into technology shares is symptomatic, with a rally of some 40% from the March lows. This can likewise be seen with the surge in precious metal mining stocks whose shares are up in excess of 50% since then. In the short term we should expect another downward correction but this is a healthy way of skimming off speculative froth. It also reminds investors of the reality of high-risk investing.
If money printing continues apace we may see a boom transition into a bubble for equities; sometimes known as a slingshot move. The degree of excess is anyone’s guess but you don’t want to be the greater fool who is left holding over-priced shares at the peak. As ever, the public gets drawn in just as hype and hubris escalate and there is no reason to believe that the next episode will be any different. In the meantime it may be a case of making hay while the sun shines on technology meantime keeping an eye on the exit before a tipping point and subsequent topple.
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