Public Equities

Why Tech Bubble Fears are Overdone

October 2020 – 5 min read
The tech sector’s impressive performance and increasing concentration in indexes has led to concerns of expensive valuations—with some fearing that we could be in bubble territory. In our view, such worries are not justified, and we believe tech’s outlook remains healthy.

The technology sector is undeniably shaping up to be one of the front runners coming out of the current crisis. The sector has been widely covered by the media, with recent headlines drawing attention to tech’s market-leading performance, high concentration in benchmark indexes and, by some accounts, expensive valuations—with some market commentators going so far as to claim we could be in bubble territory.

This creates the impression that the market has potentially run too far, and that technology is once again to blame. In our view, this is an oversimplification—indeed, the devil is in the details, and unpacking these statements is key to figuring out what is really going on.
 

Technology’s Outperformance

The MSCI All Countries World price performance over time, as well as for the constituent sectors, indeed shows that tech has led the market. In fact, the proportion of market cap that is accounted for by the 10 largest companies is now at levels not seen in recent times, and is a source of much angst in the business media given that the list is dominated by technology and internet companies1.

We would note, though, that this analysis stops short of fully understanding what is really happening. The simplest rebuttal is to note that during 2020, the impact of COVID and the subsequent recessionary impact on specific sectors of the market has meant an underperformance of the financials and energy sectors, as well as many smaller companies— which has shifted the index makeup much more toward the larger-cap technology and internet companies. Note also that the concentration of the enterprise values of the top 10 index constituents is far less severe, as their balance sheets are extremely healthy and give comfort that share buybacks can increase if these companies need to support their share prices.
 

1. September 2020 top 10 constituents of the MSCI ACWI = Apple, Microsoft, Amazon, Facebook, Alibaba, Alphabet, Johnson & Johnson, Tencent, TSMC, Nestle. December 1999 top 10 = General Electric, Exxon Mobil, Pfizer, Cisco, Citigroup, Walmart, Microsoft, AIG, Vodafone, Merck.

Want to read the full article?

View PDF

Matthew Ward

Head of Global Technology Equities

Colin Moar

Investment Manager, Global Equities—Technology

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.