Economic Outlook: Out of the frying pan into the fire?

01 Mar 2022 Expert insight

Charity investors will be aware of the heightened volatility seen in financial markets in the opening months of 2022. Within the equity market, tension has been notably heightened in the technology sector. It would now seem that the bubble in profitless tech and so called “meme” stocks may be bursting in front of our eyes.

In the last few months profitless tech companies seem to have lost their lustre in the face of higher inflation and likely interest rate rises. Examples of this include Peloton and Zoom, which have both fallen more than 70% since their peaks. Statistically, if a stock trebles, but then falls more than 67%, it will be lower than where it started.

Safety in mega-tech?

In response, investors are not surprisingly looking for safety, and many think there is safety in the mega-tech stocks such as Apple and Microsoft. Yet despite some reassuring recent results, investors should be wary of treating stocks of this ilk as safe havens.

Let us take Apple as an example. Apple is the most valuable company in the world and without doubt one of the most successful businesses of this century. Today, it is valued at $2.8tn. For context, World Bank data shows that this is larger than the GDPs of the UK, India and France.

The vast bulk of the rise in Apple’s value over the last decade has come from investors’ increasingly exuberant revaluations of Apple’s stock price. In an environment of higher inflation and rising interest rates, similar revaluations cannot be relied upon in the future.

So is this just another doom-laden attack on the biggest, best and most valuable companies in the world?

Well, yes and no…the megatech companies such as Apple and Microsoft are real businesses with real revenues and are immensely successful and profitable. They are most definitely the companies of today and may well be the companies of tomorrow.

But are they safe at their current huge valuations? Higher inflation and rising interest rates have historically led to lower valuations, especially for highly rated growth stocks. This is happening already in the profitless tech stocks – with dramatic results.

Size and past success should never be confused with safety nor future success, which no one can really foretell.

Hannah Nairn is an investment associate at Ruffer  

Ruffer LLP is a limited liability partnership, registered in England with registered number OC305288 authorised and regulated by the Financial Conduct Authority. The information contained in this article does not constitute investment advice or research and should not be used as the basis of any investment decision.  


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