Blog: You, us, everyone

General state of affairs

Last week, the tech-heavy Nasdaq ended 3.3% lower, the S&P 500 dropped by 0.7%, and the major index in Europe, the Euro Stoxx 600, gave up 1.1%. The risk-off move came after an average performance of almost 70% (based on March lows). The question of whether the market will take a break or not is therefore warranted.

We don’t think that the correction which occurred at the end of the first week of September is the start of a new trend (downtrend) but is rather a mid-cycle correction that typically occurs after a rapid bull-market move. In general, these mid-cycle corrections usually offer a valuable buying opportunity for long-term investors, as the market dips by 10% to 15% in general. Renewed pressure could occur once a COVID vaccine is released or once the economy returns to the new normal standard cruising speed. 

Having said this, we remain positive on the market and in particular for tech-related stocks since companies are more digital and virtual. Therefore, products and services that are geared up to meet the stay-at-home requirements will experience a higher growth trend than others. We also believe that the supporting tech rally based on disruptive trends is far from over.  

Within the disruptive business climate, we favor companies in areas of 5G, digital advertising, and a select number of semiconductors that will benefit from the oncoming product and service cycle.

Mid-term outlook

Is the market expensive?

The US tech sector has climbed to its highest-level post 2001, with IT trading at 27x consensus forward EPS estimates, up around 22% from the beginning of the year. But, using the Nasdaq composite as a proxy, valuations are still well below levels seen at the height of the dotcom bubble of the late 1990s, when the index forward P/E rose above 70x.  Also, when looking at valuations in relation to forward growth rates, Nasdaq stocks are still cheaper than traditional brick-and-mortar companies.

Can we expect further central bank actions? 

We remain positive on markets because central bank policies are the backbone of present investment strategies. They have proved to be a reliable tool as, month after month, the economy further recovers, unemployment rates decrease, and consumer confidence is returning.

US-China trade war:

Reuters reports the White House is considering adding Chinese chipmaker SMIC to its “entity” trade blacklist. If SMIC is added to the list itself, it could lose access to critical equipment, software and support needed to fabricate semiconductors, with few viable alternatives, which in turn could back-fire on US consumers. As we approach US elections, both US parties will continue to experiment with “tough on China”. We do not expect that tone and severity will change any time soon; therefore, investors should position for increased bipolarization in the tech landscape as the US and China jockey for supremacy in areas such as 5G and semiconductor manufacturing; hence more volatility is ahead of us.