The Dow Jones Industrial Average (DJIA) on Nov 24 rallied to a record 30,000 points as US President-elect Joe Biden prepares to take over the White House. Investors were also cheering the global economic recovery seen next year as more positive news on the vaccine front are announced.
However, the clutch of US tech stocks, which have helped power the gain of the market throughout this whole year amid the Covid-19 pandemic, are likely to come under closer scrutiny. Senior manager at Phillip Futures Avtar Sandu believes there might be a shift among investors to move towards value stocks instead of growth stocks, a large portion of which are the tech stocks. “The baton may well be passed on to another sector to dominate growth,” he says.
“Growth stocks such as those in the tech sector have done well but most have very expensive valuations, so we see some profits being taken off the table and invested in sectors that may well perform better going forth,” he reasons.
Even before the pandemic, the big tech names have enjoyed a glorious run. Along the way, the net worths of their head honchos such as Amazon’s Jeff Bezos and Zoom’s Eric Yuan have grown multi-fold.
Most recently, Elon Musk of Tesla has overtaken Microsoft founder Bill Gates as the world’s second richest man, after the electric car maker’s share price surged six times year to date. “We see lasting fundamental tailwinds as the new US government will likely get into action on electric cars. The transition towards electric cars picked up meaningful momentum this year,” says Norbert Rücker, head of economics and next generation research at Julius Baer.
However, despite the positives that may come with a Biden presidency, Sandu warns that the next four years would be less positive for the US tech sector as compared to when US President Donald Trump was in office.
“Biden has pledged to roll back [corporate tax rates] for companies from 21% to 28%. The White House for the past four years has been easy on Big Tech companies. [Conversely], Democrats may be more concerned about privacy, transparency, and may introduce more regulations,” he says, even though he opines that the regulations may make tech companies “more appealing” to investors, and may be “for the better good”.
However, that is not a call for investors to dump all their tech stocks. Says Sandu, “Past winners will not automatically become losers. Most tech stocks would still be expected to do good, especially those more sensitive to economies cocooning out of Covd-19. Investors holding tech stocks have to look at the same parameters that induced them to buy these tech stocks, including earnings and strong growth potential, and decide based on their own investment objectives.”
“I would continue to see growth in tech companies but it may not be as plain sailing as in the past years,” he says, before advising investors who prefer to “take advantage of the softness in tech” to take up short positions if they want.
On the predicted shift, Sandu estimates that once the Covid-19 vaccines are released to the masses, markets would see economic activity “booming” again.
He adds that “the sectors that do better when economic growth is starting to pick up are those that provide cyclical value, such as the materials, and consumer-related and energy sectors”. “Stocks in the industrials sector are also expected to do better,” he says.
Not all analysts are cautious about US tech stocks. The BlackRock Research Institute, in its Nov 23 commentary, observes that Covid-19 has accelerated some key structural trends, including increased flows into sustainable assets and the dominance of big tech companies.
While Big Tech and FAANGs have dominated headlines, the entire sector is much bigger and diverse. Yet, many of these lower profile names are sitting pat on the same structural trends — without facing the same kind of regulatory scrutiny.
“Semiconductor and software companies, for example, face few regulatory risks and enjoy long-term growth trends,” says BlackRock.