- Tech investors have had a rough two months as a number of the biggest names in the industry have tumbled into bear-market territory.
- The FAANGs (Facebook, Apple, Amazon,Netflix, and Alphabet –Google), have seen around $US1 trillion in market value wiped out.
- HSBC says investors concerns over the tech sector are overblown, and that it’s time to buy the dip.
- The bank lays out seven misconceptions about the sector.
Tech investors have had a rough two months as many of the most-popular names have tumbled into a bear-market – down at least 20% from their recent highs.
The FAANG (Facebook, Apple, Amazon,Netflix, and Alphabet –Google) stocks, which were a key pillar of support for the market, have been among the hardest hit, seeing as much as $US1 trillion wiped out from the recent peak of their market values.
And with many of tech’s biggest names sitting at or near their lowest levels in months, HSBC says this is an opportunity to buy the dip. The firm is overweight on IT stocks that are focused on hardware and semis, such as Alibaba, Samsung Electronics, Xiaomi, and Yandex.
“The declines have come against a backdrop of rising concerns over a sharper slowdown in earnings, regulatory constraints, heightened valuations, and stretched positioning,” said a group of HSBC analysts led by Ben Laidler.
“While some caution is warranted, we believe that the extent of these concerns is overblown, and highlight seven misconceptions on the sector.”
Here is a snapshot of the seven misperceptions that HSBC says investors have right now:
1. Earnings are under pressure
2. The sector’s outlook is deteriorating
But HSBC’s own tech earnings lead indicator, which aggregates a number of the timeliest IT data points, suggests that the sector is not in as bad of shape as feared.
3. It’s all about trade and tariffs
The Trump administration has so far posted tariffs on $US250 billion Chinese imports. This week, President Donald Trump hinted at the possibility of a 10% tariff on consumer goods such as Apple’s iPhones and laptops.
According to Laidler, China only accounts for just 9% of US IT sector revenues, and the imposed trade measures would take as little as 1% off of US earnings. He added that a lot of the risks surrounding trade tensions seem to be at least partly priced in, as the most-exposed stocks already trade at a 30% discount.
4. Tech is cyclical
According to HSBC data, the tech sector has become less sensitive to lead economic indicators. For example, its correlation to the manufacturing indicator ISM index has now fallen dramatically to 8% from 35% in 2015.
“We believe the tech stocks are well positioned to weather the current economic backdrop and are less susceptible to a cyclical slowdown than many investors currently believe.”
5. It’s all about growth
He added that tech is the only net cash sector globally, giving significant flexibility, and that it now has a combined dividend plus buyback yield well above market.
“These characteristics would help the sector outperform in some of the tail risk scenarios, such as an economic slowdown,” Laidler said.
6. Valuations are expensive
The continued: “The IT sector trades at over a 20% discount to long-term average PE, while hardware and semis trade at a discount to the current market multiple.”
7. The tech sector is over-owned
According to firm, there is a significant divergence between the industry groups. For example, software and services is the most over-owned industry group globally, tech hardware is neutral, and semiconductors is the most under-owned industry group behind utilities. Moreover, key sector stock Apple was among the largest single-stock underweights globally.
There’s a very simple reason why the resurgent Microsoft is threatening to overtake the slumping Apple
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