Our equities writer rounds up the state of play in the tech sector after the latest market slide. Also read what a City analyst has to say.
Followers of FAANG stocks including Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB) are sitting less comfortably after a surge in US bond yields created a drag on the value of Wall Street's high growth sectors.
The tech-focused Nasdaq closed 2.8% lower and the S&P 500 also weakened sharply on Tuesday as the semiconductor, media and software industries all retreated by 3% and nine out of the ten members of the so-called FANG+ index fell.
Along with the original FAANG stocks of Facebook, Apple, Amazon.com NASDAQ:AMZN), Netflix (NASDAQ:NFLX) and Alphabet (NASDAQ:GOOGL), this elite group also includes Tesla (NASDAQ:TSLA), Twitter (NYSE:TWTR), Chinese search engine Baidu (NASDAQ:BIDU) and chip firm NVIDIA (NASDAQ:NVDA). The only riser yesterday was e-commerce giant Alibaba (NYSE:BABA), which lifted 1.5%.
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Last night's fall for the FANG+ index of 2.5% is cushioned by growth of 12% in the year to date and more than 200% over the past five years. But the prospect of inflationary pressures leading to an earlier-than-expected hike in US interest rates is now causing some concern.
US yields have risen over the past four trading sessions as Wall Street now anticipates a faster withdrawal of monetary support, leading to a 25 basis points rise to above 1.5% for the 10-year Treasury yield since the Federal Reserve's policy meeting of last week.
Higher rates diminish the appeal of tech stocks and other high growth sectors where the present value is built around future cash flows. By contrast, value and cyclical sectors tend to fare better, with energy closing 0.5% higher in New York last night.
Despite last night's setback, UBS wealth management's chief investment officer Mark Haefele believes strong economic and earnings fundamentals will help sentiment to recover.
He expects the 10-year US Treasury to reach 1.8% by the end of the year, but with the gradual shift in central bank policy being more reflective of good economic growth than worries over persistent inflation.
Haefele explained: “The Fed has expressed increasing confidence in the recovery, and the Delta variant appears to have hit a turning point, while activity indicators remain strong.
“Based on data going back to 1997, three-month rises in 10-year US yields of under 100 basis points have been associated with positive equity performance, with only larger and swifter moves disrupting stocks. Over the past three months, 10-year yields have risen by 7 basis points.”
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He expects further gains in the oil price to be short lived as supply disruptions ease and Opec exporters expand production, although prices for natural gas and coal are likely to stay elevated until next year when Russian, South African, and domestic Chinese supplies should recover.
Washington's debt ceiling concerns and the related risk of a sovereign default have added to negative equity sentiment in recent days but Haefele is hopeful a negotiated settlement can be found prior to a deadline of 18 October.
Against expectations for growth in global corporate earnings of 42% this year and 9% in 2022, UBS favours Japanese stocks and cyclical sectors, such as energy and financials, along with US mid-caps and companies exposed to the economic re-opening.
The recent sell-off is also a reminder for investors to diversify their sources of risk, Haefele added.
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