Roy Keenan from Yarra Capital Management shares insights with James Dunn from The Inside Network on the role of active management. The Inside Adviser
After the Hayne Royal Commission many advisers decided to steer away from large dealer groups in favour of becoming self-licensed. In the last six months, however, that trend has taken an abrupt turn.
Tech sector soars as bond yields and banks fall
Despite the crashed Silicon Valley Bank’s links to Silicon Valley, technology shares have rallied hard in in the last week. The sector has been an unexpected beneficiary of the recent share market volatility and bank failures, and some gains could be maintained if bond yields continue to fall.
Tech stocks have been supported by falling bond yields on fears the global economy could slip into recession this year, potentially forcing central banks to reverse course on monetary policy tightening and cut interest rates.
Diana Mousina, senior economist at AMP (pictured), notes that falling bond yields reflect the market repricing rate hike expectations. “Two weeks ago, the US [Federal] Funds Rate was expected to get to nearly 6 per cent, and now its peak is not much above its current level,” she said. “So, short-end bond yields have fallen, but longer-end yields have also declined from fears around a recession.
“This is boosting asset classes that didn’t do so well when bond yields rose, such as technology and bitcoin. If bond yields continue to fall, this should benefit these areas further, but only up to a point; if recession looks inevitable and company earnings start falling, then equities will decline.”
Over the past month through to Wednesday’s close, the US share benchmark, the S&P 500, has been flat, while the Nasdaq Composite has risen 3.2 per cent. Meta shares have jumped 66.2 per cent, Google shares have risen 18.2 per cent, Apple by 22.9 per cent, 13 per cent for Microsoft, and Amazon shares are up 17.3 per cent.
Chipmaker Nvidia has surged 81.3 per cent, boosted by development in artificial intelligence (AI). The company has knocked off Tesla and Berkshire Hathaway this month to become the fifth largest company in the US, after overtaking Meta in 2022.
In contrast, banks could face tough times. According to Mousina, “while banks are in a stronger position compared to the [global financial crisis] period, a banking crisis is still possible and risks having a larger chain reaction to the rest of the economy through a decline in customer deposits, falling bank liquidity, negative wealth effects for investors, and tighter credit standards and financial conditions reducing lending and economic growth”.
These fears have pushed investors into technology stocks. Blair Hannon, head of investment strategy at Global X Australia, says most of these flows into technology shares have trended toward the safer mega-cap technology stocks.
“There is a strong chance tech stocks continue to outperform a more financial sector-focussed S&P500 as they are considered to be better valued post the 2022 selloff and in this improving rate environment,” he said.
However, despite the recent flurry of buying of technology stocks, Hannon doesn’t believe technology stocks are out of the woods yet, given significant economic uncertainty. Recession fears are still firmly on the table, fuelled by the ongoing financial problems with some banks in the US and the collapse of Credit Suisse.
“Another pullback on tech stocks if a risk-off selloff ensues is a possibility,” Hannon said. “However, in the case recession fears become reality, larger tech companies such as the FAANG stocks – Facebook (now Meta), Amazon, Apple, Netflix and Google (now Alphabet) – are likely to fare better than more speculative growth [technology] companies with shallower balance sheets over the longer term due to their resiliency and ingrained ecosystem.”
AI driving growth
Another long-term theme supporting the technology sector is the rising investment in AI applications. “The big-name tech companies are putting in a foothold with Microsoft with OpenAI and GPT and now Google with Bard and integration into its G-suite office set, which remains a key opportunity for forward-facing investors,” Hannon added.
According to Morningstar analyst Abhinav Davuluri, Nvidia is one of the greatest beneficiaries of the rising use of AI apps like ChatGPT.
The growth of data-intensive AI apps is supporting Morningstar’s forecast for Nvidia’s data centre segment to grow at a 19 per cent compound annual growth rate over the next five years, and investors are pricing that in now. “We foresee healthy growth for the data centre segment,” Davuluri said.
Morningstar senior equity research analyst Dan Romanoff said Amazon could also maintain its momentum. The secular drift toward e-commerce is unabated, with the company continuing to grind out market share gains despite its size.
“Through Amazon Web Services, Amazon is also a clear leader in public cloud services,” Romanoff said.
“Belt-tightening by customers has hit Amazon’s near-term prospects, and the company recently announced the closing of eight Amazon Go stores in addition to pausing construction on its second headquarters. Nevertheless, we still foresee healthy long-term growth.”
