Bank of America Merrill Lynch sees the tech industry facing some considerable headwinds going forward, and thinks investors should reduce exposure to the sector.
Michael Hartnett, the firm’s chief investment strategist, provides 10 reasons why.
They say all good things must come to an end. And a version of that is playing out in the stock market as the once invincible tech sector suddenly looks vulnerable.
That’s according to Bank of America Merrill Lynch, which says global investors should be looking to cut back their allocations to tech.
From a broad industry perspective, tech’s growth, power, and visibility make it “extremely vulnerable to increased regulation and taxation, most especially if recession wrecks government finances,” the firm’s chief investment strategist, Michael Hartnett, wrote in a recent note to clients.
And while he’s not yet calling for a full market collapse, Hartnett also forecasts some pain stemming from a “full bull detox,” or a reversal of the risk-seeking behavior that has characterized it for so long.
It’s all part of what he sees as a major shift occurring in markets. And for tech specifically, he sees 10 major headwinds facing the industry that he says should prompt traders to scale back exposure. Here they are (all quotes attributable to Hartnett):
Excess returns and high valuations— “US tech is best performing sector in QE era, up annualized 20%; ex-tech the S&P 500 would be 2,000 not 2,600 today.” Put simply, Hartnett is arguing tech has peaked, and has nowhere to go but down.
“Bubbly” prices— “US internet commerce stocks soared 624% in 7 years at their peak, 3rd largest bubble of past 40 years.” Bank of America Merrill Lynch
“Fat” market caps — “US tech market cap ($6.4tn) exceeds that of Eurozone ($5.0tn); FAAMG+BAT market cap of $4.9tn exceeds Emerging Markets ($4.6tn ex-BAT); Facebook’s (25k employees) market cap > MSCI India (1.3bn people).”
Earnings hubris— “Tech & ecommerce companies currently account for almost 1/4 of US EPS; this level that is rarely exceeded, and often associated with bubble peaks.” Bank of America Merrill Lynch
Politics — “Privacy becoming policy issue as equivalent to entire global population searches Google every 2 days; last year 1579 “data breaches” exposed 179 million records of personal names plus financial or medical data; pending US & EU regulation threaten 4% of tech revenue.”
Wage disruption— “IMF says 50% of the decline in labor’s share of income is attributable to technology (25% due to globalization); number of global industrial robots by 2020 will be 3.1 million (was 1 million in 2010).”
Tech is cash-rich, tax-light— “Sector has $740bn of cash overseas (larger than all other sectors put together ($510bn); effective rate of tax on US tech companies is 16.9%, lower than the 19.3% paid across the S&P 500.” Hartnett’s argument is that this makes them more vulnerable, should these advantages dissipate.
Tech is the most lightly regulated sector — “Just 27K regulations for tech; by comparison manufacturing regulated by 215K rules, financial sector by 128K.” Bank of America Merrill Lynch
Tech is particularly exposed to trade developments — “US tech has highest foreign sales exposure (58%) of all US sectors.”
“Occupy Silicon Valley” — “Tobacco (1992), financial (2010), biotech (2015) industries illustrate how waves of regulation can lead to investment underperformance.”
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