When unease over tech stocks meets Japanese bond wobbles, investors should watch out
Nicholas Spiro says recent bad news for tech giants, especially Facebook, following a two-year rally comes at a bad time as sudden turbulence in the world’s second-largest bond market may compound the pressure they face
Acronyms and catchy labels have long been popular in financial markets.
Since the turn of the millennium, there has been a surfeit of abbreviations that have come to dominate the financial lexicon, ranging from the BRIC – the quartet of Brazil, Russia, India and China which became a shorthand for the rise of emerging markets – to QE, or quantitative easing, the large-scale purchases of assets by central banks that have been the mainstay of ultra-loose monetary policy.
Over the past week, two abbreviations have grabbed the headlines: FAANG and YCC. Two or three years ago, both terms did not even exist, or were just beginning to catch on. Now, they are the subject of intense scrutiny on the part of international investors.
The FAANGs refer to the five high-flying US technology firms – Facebook, Apple, Amazon, Netflix and Google’s parent Alphabet – that have driven the rally in global equity markets over the past few years. According to Bespoke Investment Group, a US consultancy, the FAANG bloc, which accounts for 13.6 per cent of the benchmark S&P 500 index, has created as much value this year as the rest of the index put together.
The term YCC, meanwhile, refers to the yield curve control scheme introduced by the Bank of Japan (BOJ) in 2016, designed to keep the yield on the country’s 10-year bond at close to zero per cent as part of an aggressive easing of monetary policy aimed at putting an end to decades of on-and-off deflation. With the Federal Reserve and the European Central Bank at different stages of removing stimulus, the BOJ is the last man standing in the post-2008 world of super-loose policy.
At the start of this week, the FAANGs and YCC were the focal point of market anxiety.
Following last Wednesday’s announcement by Facebook of lower-than-anticipated user and sales growth numbers for the second quarter, which caused the social media giant’s shares to plummet 20 per cent last Thursday (the sharpest ever daily decline in the share price of a US-listed firm), concerns about the valuations and future growth of Big Tech companies have deepened. With Twitter and Netflix, two other tech behemoths, also reporting weaker-than-expected numbers, the New York Stock Exchange’s Fang+ Index suffered a correction on Monday, having slid more than 10 per cent from its recent high on June 21.
The sensitivity of investors to any sign of slowing growth among the FAANGs stems from the fierceness of the two-year-long rally and the implications of a deterioration in sentiment for Asia’s tech giants. China’s BAT trinity of Baidu, Alibaba and Tencent are also having to contend with the fallout from the trade war between Washington and Beijing and the recent tightening in liquidity resulting from China’s deleveraging campaign.
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While the announcement on Tuesday of strong earnings from Apple, underpinned by robust demand for the company’s new iPhones, suggests that pessimism regarding the FAANGs is overdone, the scope for further price declines is significant. According to the latest fund manager survey published by Bank of America Merrill Lynch, the tech trade has become overextended, with bets on the FAANGs and BATs identified as the most crowded trade for the sixth month running.
This is what makes the sudden burst of volatility in Japan’s normally placid bond market all the more worrying.
The tech-led rally has been fuelled by extremely loose financial conditions, particularly low real interest rates. Yet on Wednesday, the yield on Japan’s 10-year bond experienced its sharpest one-day rise in two years as traders began testing the BOJ’s defence of its new target range for the benchmark yield. Although Japan’s central bank pledged at its meeting on Tuesday to maintain its vast stimulus programme, markets are questioning the scheme’s sustainability, given the mounting strains on Japan’s banking sector and the persistence of subdued inflation.
If Japan’s bond market, which is the world’s second-largest and whose ultra-low yields have been helping suppress borrowing costs elsewhere, becomes a source of volatility, debt markets could come under much greater strain, putting the tech trade under more severe pressure.
Bank of America is already advising its clients to start betting against the FAANGs as central banks withdraw stimulus.
While investors in Apple and Alphabet, whose shares have risen 9.5 per cent and 10.5 per cent respectively in the last month, will doubtless disagree, they, too, would do well to keep an eye on Japan’s twitchy bond market.
Nicholas Spiro is a partner at Lauressa Advisory