SINGAPORE (July 14): Morgan Stanley warns that a new tech bubble might be in the works, given how the fast and high tech stocks have gained in recent months.
Back in March 2000, the tech-heavy NASDAQ Composite index surpassed the S&P 500. From 1995 to its peak in 2000, the NASDAQ rose 400% before the dot-com bubble burst in April that year. At the time, the index stood at 5,048.62 points, the first time it had closed above the 5,000 level.
The NASDAQ, as of July 9 is up 17% year to date, while the broader index S&P 500 is down 2%. “That differential is wider than even at the height of the NASDAQ dot-com bubble in 2000,” says Andrew Slimmon, head of the applied equity advisors team at Morgan Stanley Investment Management.
While Slimmon acknowledges that the market is not a “perfect forward predictor”, he feels the upward climb of the NASDAQ, which puts it at 20% above its 200-day moving average, makes the index “overbought”.
“One electric car stock in the NASDAQ traded more notional volume on July 7 than the entire S&P 500 ETF did,” he adds, referring to Tesla, which surged from around US$1,400 in July 10 to as high as US$1,764.06 on July 13. To him, it is a sign of “irrational exuberance”.
Slimmon reminds investors that after the tech bubble burst in 2000, what ensued was a “decade-long hangover.”
As earnings season looms, investors should keep a watchful eye out, to see if “unreasonable stock valuations” are indeed as such, he says.
“Ultimately, what historically has brought them down is their inability to deliver on these unrealistic expectations needed to justify their current stock prices. That is what ultimately popped the NASDAQ bubble in 2000. The internet was here to stay but companies just could not live up to hype and that came to light during earnings season,” he says.
If investors are keen to stay vested in tech stocks, Slimmon’s suggestion is to look at counters in Asia ex-Japan, which comprise some 20-25% of Morgan Stanley’s two global strategies.
He feels that these stocks, in contrast to their US counterparts, are “cheap” relative to their growth rates. “If they could ever achieve US tech valuations, there should be dramatic upside to these stocks,” he says.
“We are delighted to see these stocks finally breaking out as weakness in the US Dollar and Renminbi strength have pushed flows back into this region. We still think it is in the early innings for this move,” he adds.