Tech sector’s end of stock market dominance? News Flash

Questions have been raised about the tech sector’s stock market dominance over the past decade and whether this is likely to continue. An article on this subject appeared in a recent edition of the Wall Street Journal.

Individual tech stocks have recorded some of their sharpest falls this year, with hundreds of billions of dollars in market capitalisation evaporating – sometimes within hours. In May, Snap shares lost 43% in a single session, representing a loss of roughly $16 billion in market value. Earlier this year, Meta lost nearly $240 billion in market value in one day. More broadly, Cathy Wood’s high-profile Ark Innovation ETF, comprising high-flying tech stocks and the Nasdaq Golden Dragon China Index, are down 73% and 64% respectively since their February 2021 peaks. Conversely, the US tech-dominated Nasdaq Composite Index is now in bear market territory, having dropped by 25% thus far in 2022.

The magnitude of the declines in tech have raised questions as to whether the sector is likely to continue its dominance in stock markets indices seen over the past decade. However even after the recent selloff, the sector still makes up 27% of the S&P 500.

The tech selloff, in general, has been caused primarily by these companies’ elevated valuations being considered by some investors to be a less attractive investment case in a rate hiking cycle. This is because technology shares tend to be valued on their potential projected well into the future. In a higher rate environment, a larger discount factor is applied to longer-dated earnings, thus reducing their present value more significantly than companies with stronger short-term profitability.

From a Dynasty perspective, our offshore managers have their tech exposure weighted to old-line technology companies such as Amazon, Microsoft, and Meta (previously Facebook), which are highly profitable and cash generative, all now trading at less demanding valuations than they were during the previous tech selloff of 2000 and 2001. These companies also have barriers to entry, pricing power, and relatively low input costs – qualities which are appropriate for a high inflation environment.

In conclusion, we feel that an increasingly digital future with enormous investment in innovation is a given. It is therefore extremely likely that the tech sector will retain its dominance witnessed in recent years.

“The rapid progress of information technology in recent decades has made Silicon Valley the capital of ‘technology’ in general. But there is no reason why technology should be limited to computers. Properly understood, any new and better way of doing things is technology.”

– Peter Thiel, author of Zero to One

Global News

US inflation numbers for May as released today show an annual CPI rise of 8.6%, representing a fresh 40 year high. This dashes hopes that inflation had already peaked and promotes fears that the Fed will be required to ramp up measures even further to slow down the economy. Treasury yields spiked on the news, the dollar strengthened, and the S&P was down 2.58% as at 5.30pm.
Should the US economy slow, in contrast to brisk growth in Australia, UBS is expecting a rally in the Australian dollar to levels last seen more than a year ago. After rebounding from a two-year low last month, UBS says the currency could rise 11% from that level to as high as 76 US cents by the end of December.
For the second consecutive year, Hong Kong is now the globe’s most expensive city to live in as an expat, according to a new study by ECA International carried out in March. New York and Geneva are second and third. The cause of Hong Kong’s status is higher prices and a stronger currency over the past year. London and Tokyo round out the top five. Soaring rental costs were part of the reason London and New York claimed their positions in the top five, with rent in those cities rising 20% and 12% respectively.
In the UK, thousands of workers will be starting a four-day work week from Monday with no cut to their pay, provided they maintain productivity. Involving 3 000 workers and lasting six months, this is the largest trial of its kind. The test spans 70 companies, ranging from financial services providers to a fish-and-chip restaurant.
This comes as employees are increasingly rebelling against returning to the office, a shift made possible by the increasingly less severe Covid-19 virus. Executives’ expectations of people coming back to the office five days a week have declined from 50% a year ago to just 20%. This is according to data from security firm Kastle.
Sources claim Apple plans to expand its range of laptops using its new, faster in-house chips next year, aiming to grab a bigger slice of the market. The company is working on a larger 15-inch MacBook Air for release next spring in the northern hemisphere. The shift away from Intel chips has been a success for Apple, boosting revenue significantly. The company reported $10.4 billion in Mac sales during the fiscal second quarter, nearly double the $5.4 billion it generated in the second quarter of 2020, before Apple made the switch.
Foxconn, the company renowned for assembling Apple products, is moving closer to its roots. However, instead of making parts for mobile devices, the company is looking to focus on producing all the key components for electric vehicles. According to Bloomberg Opinion’s Tim Culpan, there is massive growth potential for this company.
At the time of writing, the S&P Index ended the week 4.8% weaker.

Local News

South Africa’s economy is back at the size it was before the Covid pandemic struck, having grown faster than expected in the first quarter of the year. GDP expanded 1.9% in the three months to March, compared with revised growth of 1.4% in the previous quarter, according to Statistics South Africa figures. The median of 13 economists’ estimates in a Bloomberg survey was for growth of only 1.2%. The economy grew 3% from a year earlier.
This comes as business confidence slipped from 46 to 42, according to the RMB/BER Index which shows that almost 60% of the 1 300 managers surveyed in the building, manufacturing, retail, wholesale, and new vehicle trade sectors are not optimistic about the current business climate. This does not bode well for the second quarter, despite gains in the first three months.
Meanwhile, a shift in the way the SA Reserve Bank implements monetary policy may lead to greater volatility in the rand. On Wednesday, the bank moved to a surplus system from its current deficit setup, meaning commercial banks will be allowed to hold and earn interest on excess reserves. The central bank also introduced measures to prevent banks from hoarding liquidity, and thus help maintain an interbank money market.
In political news, president Cyril Ramaphosa has been hit by a scandal involving the theft of millions in forex from his farm. Without revealing details about the theft, which took place at his Phala Phala farm in 2020, Ramaphosa has said that since the incident was still under investigation, it was not possible to fully explain what had transpired. He claims, after allegations that he had breached foreign exchange regulations, the money was used to buy and sell livestock. Irrespective, the optics of this “Farmgate” scandal are an embarrassment for the presidency. Furthermore, the timing of the suspension of the public protector, Busisiwe Mkhwebane, immediately following her being tasked to investigate the incident, appears to be politically motivated.
Writing for Financial Mail, Justice Mahala’s latest column questions what lurks behind disgraced former spy boss Arthur Fraser’s criminal complaint against Ramaphosa. This, he said, points to the war against the president intensifying ahead of the ANC’s national elective congress in December, which may trigger a step-aside motion against the president.
With a history of embarrassing security breaches in what should be our nation’s most impenetrable homes, South Africans would be justified in asking: Where are the billions set aside for VIP Protection Services going? The Daily Maverick investigates.
Key figures in South Africa’s State Capture project, Rajesh and Atul Gupta, have been arrested in Dubai. Although the news will be widely celebrated following years of unsuccessful attempts to apprehend the ‘fugitives of justice’, there could be a long road ahead before the brothers are seen again in South Africa to face charges.
Civil society organisations have raised concerns about the Department of Social Development and the South African Social Security Agency not paying Social Relief of Distress grants to millions of poor South Africans in April and May. This is despite Ramaphosa’s pledge, during the state of the nation in February, that the distress grant would be extended until March 2023.
Meanwhile, tech heavyweights Naspers and Prosus saw their market cap surge by a combined R177 billion on Wednesday due to positive news about gaming in China, a major source of revenue for Tencent, the group’s largest investment. The Naspers share price closed at its highest level since March, up 8.91% to R1 823.94, while the Prosus share gained the most in six weeks, up 6.81% to R842.80.
At the time of writing, the JSE All Share Index was down 4.4% for the week, with the rand 1.4% weaker against the US dollar.