On Tuesday the giant US tech companies, dubbed the Faangs (Facebook, Apple, Amazon, Netflix and Google/Alphabet) suffered their heaviest collective single day losses to date. The NYSE’s Fang+ index, formed in 2014 and tracking the Faang stocks plus another 5 tech giants including Tesla, dropped 5.6%. Up until this week, the Fang+ had outperformed the S&P 500 by 100% since 2014 and have been a major influence on the strength of the strong US equities bull run that has been uninterrupted since early 2016.
On Tuesday, Facebook’s shares fell 5%. The drop took total losses to £67 billion since the scandal broke of data of 50 million users falling into the hands of UK political consultancy firm Cambridge Analytica. The Facebook scandal has spilled over into the share price of big tech peers. Twitter share’s price fell by 12% on Tuesday while Google-owner Alphabet dropped 4.6%, Tesla 8%, Nvidia 7.8% and Apple 2.6%.
But why would Facebook’s issues have such a negative impact on other tech companies? The Facebook incident appears to have dented wider confidence in the growth prospects for tech shares. Many now seem to fear changes in how regulators and tax authorities treat giant tech. Luca Paolini of Pictet commented for the Financial Times:
“Investors are clearly worried that we may be about to see a regime change in regulation. History tells us that when a company or sector becomes dominant, it tends to attract the attention of either the regulator (US) or the taxman (Europe)”.
This has led to investors repricing tech shares on the basis of increased uncertainty over how this might impact their future growth prospects. However, the correction has to be seen in context. The price/earnings multiples reflected in the Faang share prices have simply dropped back to where they were a year ago. Warren Buffet stated that the Faangs were so valuable due to their ‘wide economic moats’, or dominant monopolies and huge cash reserves. This, he believes, set the tech giants up to dominate for a generation. Markets might be starting to suspect these economic moats are not quite as wide as previously believed.
Another argument is that a handful of companies dominating equity markets to the extent the Faangs and tech stocks have over the past 12 months has historic precedent. In the late sixties the ‘Nifty Fifty’ stocks, 50 popular blue chip stocks, dominated as did the dotcom stocks in the late nineties. On both occasions it became apparent that this dominance was the last big driver, or ‘melt-up’ with which bull runs would end on.
There’s currently a huge amount of capital invested in the Faangs and Fang+ index. If institutional investors move to book significant profits now and move money elsewhere, the current tech stocks slump could indicate the beginning of an extended bear run in equities. The good news might be that the ‘melt up’ that has been called ran from December 3rd last year, when Trump announced corporate tax cuts, to March 12th. That’s relatively short lived and will hopefully mean a less severe correction than we have seen in the past. With no recession visible on the horizon hopefully we’ll avoid a more severe scenario.
Since March 12th, income stocks such as utilities and telecoms have outperformed the Faangs. This could well indicate the anticipated change in cycle to a period of income stocks investment after several years of growth stock dominance. However, many analysts believe the next couple of months are likely to see further tech stock and wider stock market falls. For those investing online in ISAs over the last few days until the April 4th deadline, this can be seen as an opportunity to buy at discounts as long as your time horizon for keeping capital locked up is at least a few years.