THIS TIME IT’S DIFFERENT
Despite recent events, many industry followers do not believe that history will repeat nitself. Back then, “the cycle became overhyped, and valuations had reached unsustainable levels,” Lew Piantedosi, vice president and portfolio manager at Eaton Vance Management, says.
“Many of the companies of that time did not have sustainable business models, little or no cash-flow, all while trading at exorbitant valuations. You cannot compare them to today’s leading companies which have npowerful business models, prodigious cash-flows, strong balance sheets and still ntrade at very reasonable valuations.
“Also, worth noting, this era’s cycle of technology-driven innovation and disruption is impacting so many other areas of the market, ranging from industrials to healthcare, financials and consumer discretionary companies,” he adds.
Johan Van der Biest, who manages Candriam’s robotics and innovative tech fund, also believes that the situation is different from the bursting bubble at the turn of the century.
“Valuations are high but they are not that much higher than the stock market – MSCI IT is trading on 19 times earnings compared to MSCI World’s 16 times and, in many cases, they are justified because investors are benefiting from better margins, top-line growth and return on equity,” he says.
“There are other sectors that are defensive but they can be just as expensive and not have the same revenues. Take Colgate, which is generating annual growth of 3% to 4%. It is almost as expensive as Google, which has annual growth of around 20%.”
Ritu Vohora, equities investment director at M&G Investments, echoes these sentiments pointing to the robust 93% growth in first quarter earnings of the S&P 500 technology sector compared to a market level of 24.2%.
Even Apple surprised analysts by beating expectations in the first quarter thanks to a more diversified revenue stream and booming services which saw sales soar 31% – growing at their fastest pace for two years. The company has expanded its offering through a base of more than 1.3 billion devices to include music, cloud storage, movies and apps.
Views are much more mixed on Facebook where large institutional investors including CalSTRS, the second-largest pension fund in the US, are putting pressure on the company to implement governance reforms in the wake of the Cambridge Analytica scandal.
The data-mining company, which was a digital consultant to Donald Trump’s 2016 presidential campaign, has been accused of harvesting the personal data of around 87 million users. It has recently ceased trading.
Investors are calling for increased board diversity and independence, equal shareholder voting rights, a separation of the mroles of chief executive and chair as well as menhanced oversight and disclosure of Facebook mdata privacy policies. This is not the first time they have raised their collective voices. Last year, Sweden’s national pension fund AP7, one of the largest shareholders,
stopped Facebook from reclassifying its stock because it said the share dilution would have cost shareholders around $10bn (£7.5bn).
Often though, investors have been thwarted in their attempts to change the corporate culture because chair Mark Zuckerberg may only own around 16% of the company’s shares but controls 60% of its voting rights.
