UBS strategist: Tech volatility should not be below ‘the most boring’ industry of all


UBS strategist Julian Emanuel called this tech correction before it even started. Emanuel says there there is still room for tech to fall more pointing out that tech volatility is currently way too low. He expects tech stocks and the broader market to end the year higher and says this is a dip you should buy into. Following is a transcript of the video.

Blodget: So talk about tech. There has been a can’t miss trade for many years but everyone was startled recently when the FANG stock suddenly corrected. What do you see there?

Emanuel: Well, it’s been can’t miss if you held it over the long haul and you know, sort of put away your portfolio periods in 2000, obviously in 2007. If you were technology investor you have to be prepared for volatility. And what we’ve seen over the last six to nine months is incredibly low volatility and technology that really doesn’t reflect the risks and the emotions that go into investing in an area like technology. And when tech is trading at volatility lower than utilities, you know the most boring, you know, sort of yield sensitive area in the market, that to us is an imbalance that in talking to our clients we felt like the ones who were investing were getting nervous and the ones who weren’t invested had fear of missing out. And so to us, you just sort of hit this emotional peak where we felt like the gains in the FANG names in particular were making people uncomfortable. Not at all unusual to see this kind of sell-off which we do think as a little bit further to run.

Blodget: So sell-off has further to run but we are not done.

Emanuel: Correct, correct. And again I think to make the claim that technology as a sector is done with a capital D is basically making the claim that the bull market itself is going to end. And when we look at it again, just going back, we don’t see sort of a period of 2000-2003, you know, deep bare market. What we see is a correction, ultimately some time in the next 12, 24, 36 months. The Fed may overdo it as they typically do and the bull market draws to a close but we don’t see that at this point.

Blodget: So you had some fascinating observations in a recent note, called the “High Fives,” about the fact that five technology stocks have driven a significant percentage of the S&P’s run so far this year and others and prior periods in history when the strength of the bull market’s been that concentrated, we’ve seen a wide variety of different outcomes over the next few years. So talk about what we can expect there.

Emanuel: We have, we have. You know, in ’93 you saw that and you had a sideways year in ’94, and then actually when the Fed finished his rate hiking cycle at the end of ’94, you had you know the start of really what one might call the irrational exuberance period led by technology stocks. ’99 was obviously, we all know, it was sort of the height of the bubble, that didn’t end well but again if you sold into, you know, what happened in 2000 depending on your time horizon, you know you left much too early because since 2000, the stocks are up thousands and thousands of percents. We saw the same thing in 2007. That of course was the start of the financial crisis but again, the message is, it’s not uncommon and it doesn’t necessarily have to “end in tears.”

Blodget: So which are these five stocks and certainly, in some of the examples that you put forth of the next twelve months, they did end in tears. In fact, a lot of tears. So there is that risk too.

Emanuel: They did. It’s basically the household FANG names and the “M” for Microsoft, which has really had tremendous gains over the course of the last 30 years as well. But the message for us is when we look at it the earnings power of these companies and the valuations, although they may be somewhat uncomfortable. First of all, they’re nowhere near the excesses that we saw earlier towards the bubble peaks. But again the earnings power of these companies is very, very profound. And in a world where growth continues to be difficult to come by, that’s something that we think investors will take notice of.