Join Asia’s stock ‘party’ but stay away from ‘irrational’ tech valuations, BlackRock says

The world’s largest asset manager sees further upside in Asia, but cautions against investing in technology companies where share prices and expectations are stretched

PUBLISHED : Wednesday, 22 November, 2017, 9:54pm
UPDATED : Wednesday, 22 November, 2017, 11:07pm

Big newspaper headlines pointing to rocketing stock markets in Asia might leave one with the impression that it is too late to join the equity party.

But BlackRock, the world’s largest asset manager, sees further upside to the ongoing market rally in Asia, with the caveat that investors should shy away from the technology sector, where share prices and expectations appear stretched, even bubble like.

BlackRock’s head of Asian and global emerging markets equities, Andrew Swan, says his firm is underweight the technology sector because of concerns over valuation, although he concedes there are some companies in the sector which look attractive.

Asian markets have had a strong, broad-based earnings recovery, with the technology sector seeing the biggest structural growth, particularly among large companies. The MSCI EM Index has risen 33 per cent so far this year, while the MSCI EM IT Index has surged 68 per cent.

Swan cautioned that valuations and price earnings multiples have expanded this year under the belief that every technology company will benefit from the wave of technological change. Such thinking was a “fundamental mistake”, he said.

As a group, the share prices of technology companies have risen faster than earnings this year.

Swan said that in addition to positive earnings surprises, many tech companies also enjoyed substantial re-ratings by the analysts who cover them.

In a sign of exuberant investor behaviour, Swan said he is starting to see “thematic type” movements in stocks which are not driven by fundamentals, a sign that an equity bubble is starting to form.

“You have to be very stock specific within this technology space. It is a sector which is rife for disruption in the coming years,” Swan said.

Swan is sceptical of the perceived benefits of artificial intelligence and robotics to the current generation of technology companies. He cites the historical precedent where a new technology, namely the internet in the late 1990s, ended up disrupting the status quo. Today, only a few large tech companies survive from that era.

“There are some companies that will do very well out of this wave of technology change, and others which will be significantly disrupted,” Swan said.

Irrational exuberance can be seen as investors pile into technology shares, he said. Several huge tech IPOs that made successful debuts recently were by companies that have very short track records, a sign that investors are getting carried away, he said.

Swan says he is not optimistic towards the semiconductor industry, believing the sector has already peaked or will do so in the coming six months, after having gone through a sweet spot in terms of profitability.

Swan is also sceptical whether technology hardware companies will deliver in terms of earnings.

Meanwhile, he said investors are ignoring companies outside the technology sector which have strong earnings growth, even as their share prices lag.

BlackRock prefers domestically exposed cyclical sectors such as in energy, materials and financials.