It is tempting. Our human brain is all about pattern recognition. So if you see the same old ‘déjà vu’ again, your brain says ‘match’ and off you go projecting onto this a repeat of history.
The neurons of the average investor flashed ‘Tech bubble’ – euphoria all the way and the Nasdaq 100 back at year-2000 levels in terms of hot air and the like.
We beg to differ. Agreed: there is no denying that investors have gotten carried away with some of the latest IPOs in the information technology (IT) space, where valuation levels already looked stretched against the offering price. Yet there are important differences to the gold rush of 20 years ago. First, the valuations of the large IT franchises are nowhere near the sky-rocketing levels from back then (see number of the week). In fact, IT stocks are currently trading at their average premium in historical terms, which is around 30%. This is what investors usually grant tech companies for the superior earnings growth that they offer them as compared to the overall market. Second, the quality-growth guys are part of the game this time around. This is quite the opposite from the late 1990s, when they found sentiment was turning ‘irrationally exuberant’.
So where does this leave us for IT in autumn 2020? Overall, we stay positive and reiterate our Overweight rating for the IT sector. In terms of subthemes, we recognise the advanced sentiment in Cloud Computing and Artificial Intelligence and downgraded it from Bullish to Constructive. Investors who have missed the train in broad technology should use the current weakness as a buying opportunity for big names.
What is going on in the markets? Julius Baer’s experts share their views.