The tech stock bubble continues – but wise investors should look for value elsewhere

As tech stocks continue to soar, real value has been forgotten. It’s fine to hold tech, says Merryn Somerset Webb, but investors should look for value elsewhere, too.

Marks and Spencer © Matt Cardy/Getty Images

Look at a chart of the performance of US equities relative to those of the rest of the world and you may instantly feel that something has to change.

Until 2009, global markets moved more or less in step. Then the US started to pull away. Over the past decade, US stocks have outperformed those of the rest of the world by 100%.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Look at fund performance tables in the US and you'll see this very clearly. Of the top ten performers of the last decade, nine have been heavily focused on US equities and in particular US technology stocks. The only exception is a tech-heavy Japanese fund.

However, look back another decade and you might feel vindicated in thinking that change is on the way. Guess what eight of the ten worst performing funds were invested in? Yup, tech stocks mainly US or Japanese. If you had sold all your commodity-heavy funds (the best performers until 2010) and switched into what were then the ten worst funds of the decade (invested in big tech) you would have outperformed by 260%. Nice.

Advertisement - Article continues below

There is, according to Simon Evan-Cook of Premier Asset Management, something of a "ten-year tell" here and one that suggests investors who stick with US technology stocks today "are making the same costly mistake they made ten years ago" assuming that an investment trend is a permanent state of affairs.

We are in the middle of an extraordinary technological revolution

Not everyone is convinced about this. Look, for example, to the world's biggest equity investor, the Norwegian Oil Fund. It plans to reallocate up to $100bn from European equities (where you could argue there is value) to US equities (tougher).

According to George Cooper of Equitile, an investment manager, that's the right choice. Industrial revolutions are not "mean reverting" (no one ever went back to horses for long-distance travel) and we are in the middle of one extraordinary industrial revolution.

A small number of extraordinary companies which just happen to be disproportionately located in the US "are transforming the global economy" via a digital revolution that is still in its infancy. That's not changing any time soon.

It won't go back to the way things were and it won't move elsewhere innovation clusters tend to be "both persistent and powerful". The point for investors to remember is this: "When the processes driving markets are not mean reverting, the markets should not be mean reverting." Thus, Equitile is sticking with growth stocks, and sticking with the US.

But while trends may change lives, they don't always make money

I love an intelligent disagreement. But you may be wondering which way to jump. The key thing is that both of these points of view can be correct.

Advertisement - Article continues below

We do anchor to prices and when they move we are often lousy at reappraising the fundamentals and changing our views. Plus, there are always companies that are impossible to call overvalued for the simple reason that we don't yet know how much they can change our world.

But we must also bear in mind that while trends can change our lives completely, they won't necessarily make us money. Those who bought tech funds in 1999 reasoned that their services would dominate our lives. Those who bought commodity funds in 2010 reasoned that China would keep growing and gobbling up resources. Both ideas were, as Mr Evan-Cook puts it, "spot on". Yet both lost investors money.

Go back, if you will, to railways. They changed everything and lost a lot of people a lot of money. So, yes, US technology companies will very probably continue to dominate our lives for many years to come. But it's also possible that the enthusiasm for them as an investing trend means that too many of tomorrow's returns are reflected in today's price. However, it is also possible that the same enthusiasm has left real value in its wake.

Compromise hold some real tech stocks, but look for value elsewhere

So what do you do? It isn't fashionable in the UK at the moment, but how about a little compromise?

You might do this by refusing to hold US companies that are ordinary companies masquerading as tech firms the soon-to-be-listed WeWork being the classic example and holding only those that are really doing something special (or the few funds capable of finding special).

Next, you might look at where there is value. Look at the worst-performing funds of the past decade and you will find a few energy funds in there. I mentioned here a few weeks ago that the oil price might soon be on the rise, in which case you might look at the investment trusts in the area the BlackRock Energy and Resources Income Trust is down a satisfying 20% in the last five years and yields 5%.

Advertisement - Article continues below

Much riskier is Riverstone Energy. It is more focused and holds unlisted assets. Performance has also been horrible and the trust now trades at a 30% discount to its stated net asset value.

You might also look to non-tech Japan, maybe even real estate. Some of you will remember when the land on which Tokyo's Imperial Palace sits was worth more than California. Waverton Asset Management has updated the comparison today the assets of all 70 real estate companies listed in Japan are worth less than the combined market value of Uber and Lyft.

Finally, what of UK retailers? The dwindling market capitalisation of poor old Marks and Spencer means it has been booted out of the FTSE 100, but it actually makes a profit. In fact, it's trading on a price/earnings ratio of under eight times, with a thumping dividend yield of 7% that is nearly twice covered. All this at a time when most people in finance spend all their time worrying about negative interest rates.

Even so, I haven't bought the shares. I have to feel that lingering brand loyalty can be turned into actual sales, plus the jaw-droppingly awful store layout will have to improve before I can really contemplate it. But I have, as a small act of solidarity with and perhaps long-term affection for the company, bought a pair of M&S shoes (buckled square toe loafers, should you be interested).

If no one in the office giggles when I wear them, perhaps I'll take another look at M&S shares for my Sipp.

This article was first published in the Financial Times



Stock markets

Don’t buy into tech company IPOs

Tech firms are listing on the stockmarket in their droves, with their private-equity backers raking in the cash. That’s perfectly sensible. What’s not…
6 May 2019
Investment strategy

Great frauds in history: John G. Bennett Jr’s Ponzi scheme

John G. Bennett Jr's classic Ponzi scheme cost his investors $135m and ended him ten years in jail.
18 Feb 2020
Investment strategy

The trouble with "World" stockmarket indices and how to fix them

Indices such as the MSCI World or the FTSE World are not an accurate reflection of the global economy
17 Feb 2020
Share tips

Semiconductors: invest in the future of technology

Semiconductors are a key component of computers. Major growth areas such as artificial intelligence and the “internet of things” will underpin future …
13 Feb 2020

Most Popular

House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020

The euro’s slide against the US dollar looks set to continue

The euro has been in a bear market against the US dollar for two years now. And on a broader scale since 2008. A decline like that is telling us somet…
19 Feb 2020
Share tips

Three overlooked stocks to buy now

Each week, a professional investor tells us where he’d put his money. This week: Joe Bauernfreund, portfolio manager at the AVI Global Trust, highligh…
17 Feb 2020

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020