Why this tech boom is not a bubble

These experts explain the tech sector’s dynamics and how investors can diversify their exposure.

The lofty valuations of mega-cap tech giants including Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) will be tested later this month when earnings updates reveal the extent of this summer’s stay-at-home boost.

Ahead of these Q3 results, UBS Global Wealth Management has published a note examining the sector’s dynamics and how investors can potentially diversify their tech exposure.

The Swiss bank argues that tech stocks are not in a bubble and that many of the largest names remain attractive based on their earnings outlook. However, with growth now more expensive, it is wise for investors to consider rebalancing their mega-cap exposure towards other long-term technology themes.

Stocks including the $2 trillion valued Apple traded at record highs in early September and have shown an appetite to revisit those levels after a brief sell-off last month.

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The forthcoming earnings season, with figures due next week from Netflix (NASDAQ:NFLX), Amazon and Microsoft (NASDAQ:MSFT), will show how far the home-working trends have favoured the mega-caps.

But UBS’s chief investment officer Mark Haefele questions whether it will be the tech giants driving the next leg higher for Wall Street and other markets.

He said: “We think global equity gains from here are likely to be driven by ‘more normal’ themes rather than the ‘stay at home’ dynamics that have favoured mega-cap tech. For the next leg-up, investors should diversify.”

In his note to wealth management clients, Haefele recommends diversifying within the tech sector by looking for 5G enablers and leaders in smart mobility, cloud and gaming, as well as China’s digital economy stocks in e-commerce, food delivery, travel and fintech.

Greentech also offers multi-year opportunities across sectors after the EU’s fiscal stimulus package worth €1.85 trillion included an objective to reach carbon neutrality by 2050.

For investors still keen on diversifying away from tech, UBS suggests the next leg of the rally is likely to be driven by the under-valued UK equity market, US mid-caps, emerging-market value stocks or global industrials.

But UBS says that rebalancing mega-cap tech exposure does not have to mean selling it all off.

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Over the past five years, the bank points out that corrections in the global tech sector have typically been 10%–12% peak-to-trough pullbacks, followed by a 20% rebound in the subsequent six months.

Haefele added: “Recent volatility may have left some investors reluctant to enter the markets, but staying on the sidelines is costly and can leave investors chasing a market rally.”

He said that putting excess cash to work right away is typically the best strategy, although some investors may prefer to build-up longer-term positions by taking advantage of near-term volatility through the use of options, structured investments or a phasing-in strategy.