Less than a fortnight in and 2022 has already delivered its first stock market drama. A major technology stock sell-off — which began last week and continued on Monday — has rocked U.S. stock markets.
This tech rout has been bad news for UK investors too, including the Scottish Mortgage Investment Trust.
As one of the most popular investments in Britain, the trust has long provided investors with an easy way to back companies in Silicon Valley and beyond.
Reversal: As tech has tumbled, stocks in the ‘old economy’ – including energy and banks – have risen, giving a boost to London’s FTSE 100
But while its long-term performance delighted customers — trebling their money in five years — its share price has now dropped by 23 per cent in two months.
It has been a similar story for other popular tech-heavy funds, with Baillie Gifford American down 25 per cent in the same period.
Richard Hunter, head of markets for the investment platform Interactive Investor, attributes the tech slump to a familiar theme — inflation.
He says that big investors are increasingly nervous that persistent inflation may force central banks to toughen their policies to keep the economy in check.
Crucially, this may involve the U.S. Federal Reserve raising interest rates quicker than many had expected.
On Monday, investment bank Goldman Sachs revealed it was now expecting four rate rises (in the U.S.) this year — up from three last month. ‘Given that many of the larger tech companies trade at very high valuations, they are particularly sensitive to rising rates,’ says Mr Hunter.
That’s because the share prices of companies such as Tesla and Amazon are based on expectations of future profits.
A major technology stock sell-off – which began last week and continued on Monday – has rocked US stock-markets
If higher interest rates make money more expensive, expected profit margins will fall — bringing down today’s share price. It explains why several of the big technology companies have fallen in recent months, with Tesla and Amazon now down 13.97 per cent and 12.62 per cent since November.
As tech has tumbled, stocks in the ‘old economy’ — including energy and banks — have risen, giving a boost to London’s FTSE 100.
‘The current bout of rotation has boosted the share prices of those sectors where rising interest rates and inflation can benefit the business model,’ adds Mr Hunter.
He cites Shell, Barclays and Lloyds. In the past month, they’ve gained 8.54 per cent, 16.34 per cent and 19.35 per cent respectively.
And now travel stocks, the sector most bruised by the pandemic, are showing signs of recovery.
With the Government confirming the end of pre-departure tests (a bugbear for airlines), easyJet and IAG have risen 24.97 per cent and 25.65 per cent in the past month.
So should these latest twists and turns give retail investors cause to rethink their portfolio?
As ever, it’s important to keep things in perspective. Swings such as last week’s sell-off have a habit of making a splash, but they also tend to balance out over time.
For that reason, Mr Hunter warns that investors shouldn’t be too hasty to dump any tech assets they might own.
Investors who have done particularly well from the tech boom of recent years might want to check they are not over-exposed to the sector
But investors who have done particularly well from the boom of recent years might want to check they are not over-exposed to the sector.
Platforms such as Hargreaves Lansdown and Charles Stanley offer free guides and tools to help customers understand where their money is invested.
‘Now may be a good time to build some more resilience into your portfolio and stay away from stocks with a high degree of exuberance and speculation,’ says Rob Morgan, an investment analyst with Charles Stanley.
He names the Ruffer investment trust as a strong option for investors looking to ensure their portfolio is prepared for a potential downturn. As well as a wide spread of shares and bonds, the trust also invests in options designed to hold their value at times of uncertainty, including gold and derivatives.
While performance has been less remarkable than equity-focused funds (with £10,000 invested for five years worth £12,500), its positions should hold up better if things take a turn for the worse.
F or another option, Mr Morgan cites FTF ClearBridge Global Infrastructure Income Fund — a specialist fund investing in large-scale infrastructure projects.
‘The vast majority of the underlying assets are inflation-linked, meaning that the fund should be able to continue generating income in a higher-inflation environment,’ he says.
Over the past five years, the fund has turned a £10,000 investment into £16,100. While regarded as a higher-risk investment (owing to its narrow focus), it can help investors ensure all bases are covered at a time of uncertainty.
As for funds that will benefit from a continued rotation towards the ‘old economy’, River & Mercantile’s UK Dynamic Equity fund seeks out undervalued companies across the FTSE, with sizeable holdings in energy and banking.
Meanwhile, Ninety One’s UK Special Situations fund has large stakes in both easyJet and Jet2.
Over five years, the two funds have turned £10,000 into £12,800 and £12,100 respectively.
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