“Nowhere near bubble territory” – Kames’ Goddin on global tech boom
The notion there is a bubble in technology company valuations around the globe is misplaced and overlooks their ability to transform the markets they operate in, according to Kames Capital’s Neil Goddin.
Valuations for a number of tech companies – including the famous FAANGs of Facebook, Amazon, Apple, Netflix and Google (now listed as Alphabet) – have soared year-to-date, with the sector the standout performer in US markets.
Globally, technology stocks have also climbed sharply, with the MSCI Global Technology Index up 27.6% year-to-date, well ahead of the MSCI World return of 16%.
The gains for the sector have prompted concerns that the global technology boom has risen too far, too fast. However, Goddin, head of quantitative analysis at Kames and co-manager of the Kames Global Equity, Global Sustainable Equity and Global Equity Market Neutral funds alongside Craig Bonthron, says the sector can continue to outperform.
“These stocks are not cheap, but they are not displaying bubble-like characteristics either,” Goddin says. “Yes, they have done very well, but there are three things investors must remember.
“Firstly, many of these stocks are backing up share price gains with the earnings they are delivering, while in terms of their valuations, they are not at crazy levels when compared to periods like the dot.com bubble when some stocks were on 300 times earnings.
“Finally, there are simply a lack of alternative options for investors who need returns given the backdrop in other markets, such as fixed income where yields are near record lows.”
Tech companies globally have succumbed to bouts of selling in recent years, and may do so again, but Goddin says this is more to do with other areas of the market becoming undervalued than because technology had become too stretched.
“When we have seen sell-offs in tech over the last few years, it has not been driven by tech being ridiculously expensive, but rather because other areas have become ridiculously cheap, with investors selling shares that have risen the most to fund other purchases,” he says.
“So essentially it was about people trying to take advantage of fast money, rather than tech being egregiously expensive, and that was very apparent at the end of last year, for example.”
Within technology, Goddin and the team are pursuing a variety of themes, including the change in the computer game market, as well as the need for more data storage.
“For us, the amount of storage data space we will need globally is only going to climb, especially as we introduce more artificial intelligence and factory automation,” he says.
“We therefore hold Coherent, the Silicon Valley-based photonics manufacturer whose products are used to create semiconductors used in most modern technologies, as well as Keyence Group, the industrial automation company.”
Goddin adds that there are a number of areas of the market showing more worrying traits than technology at this point in the cycle.
“I am more concerned about consumer staples stocks and the multiples they are trading on than I am about stocks like Facebook,” he says.
“Some of the staples are on multiples of 20 times or more, with no growth to back it up, and we think they could continue their recent downtrend”.