Tech rally is not all froth and bubble as COVID turns risk on its head – Sydney Morning Herald

So there are a couple of things to unpack here.
The first is the question of why technology companies are experiencing such a stellar sharemarket run. The second is whether they are now wildly overvalued and if so will the bubble burst or deflate in an orderly fashion?
Before going on it is worth making the observation that those likening this tech bubble to the dotcom boom of 2000 are making a simplistic mistake.
The 2000 dotcom boom in sharemarket terms was little more than a speculative free for all. Tens of thousands of companies were created by a garage dwelling tech entrepreneur’s thought bubble. They were supported by investors whose approach to investing was akin to the belief they had happened on a broken poker machine that spewed money every time they pushed the button.
It was almost all froth and only a smidgen of substance.
This time around, at least in a general sense, there is much more substance and significantly less froth.
Some of the largest and most successful companies in the world – Amazon, Netflix, Alphabet (Google), Facebook and Apple – are part of the backbone of the US equities market and justifiably so. Beneath these high profile companies are thousands of lesser-known artificial intelligence startups, fintechs and software services companies that are rapidly displacing old world companies and permanently changing the way we live.
They have been growing in size and importance for many years but it has been the COVID pandemic that has turbocharged the adoption of digital technology and is therefore responsible for their coming of age.
In what appears to be COVID-19 related, in investors’ minds a more prominent divide has emerged between old line stocks that are often tangible asset-heavy and technological stocks that are tangible asset lite.
Its a slightly counterintuitive approach to favour less tangible assets during this very high-risk pandemic-induced recessionary period. But it actually makes sense.
The old line stocks have actually become riskier in the current environment. Property trusts, retailers, airlines, banks, even some infrastructure stocks, manufacturers, mining and oil extractors are all old line businesses that over time have seen growth rates decline.
The pandemic has hastened the trend and accelerated the adoption of digital products and the popularity and understanding of technology companies. In doing so the weight of money has exacerbated the exodus out of old line companies and has exaggerated the move into disrupters.
The structural change has only enhanced this momentum.
The tech-heavy Nasdaq has added 43 per cent in value since the start of April compared with a gain of 27 per cent for the S&P 500. The Dow Jones Industrial Average index (more heavily weighted to old line stocks) has risen 22 per cent over the same period.
The ASX 200 technology indexs outperformance has been even more marked than that of Nasdaq – up 57 per cent since the beginning of April – leaving the broader market to eat its dust.
It is undeniable that the Australian technology companies are a riskier mob than those that populate and weight the Nasdaq. It took only a negative report from short seller GMT on Technology One to find its way into the media to push that stock down 5.2 per cent on Monday and drag its tech siblings with it.
Stocks that are running hard, and many of which cannot yet be valued by applying an earnings multiple, carry a higher risk.
And many are overvalued.
There is undoubtedly froth in the tech stock resurgence and in the short to medium term many will probably return to earth. Investors will probably need to wear some pain.
But in the longer term, which would be a better pick – a real estate property trust holding retail property with reducing rental returns and vacant space or an electric car maker?
To put it in another time context – short the horse and buggy maker and buy Ford.

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