In less than two weeks and 2022 has already delivered its first stock market drama. A large sell-off in tech stocks – which started last week and continued on Monday – rocked U.S. stock markets.
This technological rout was also bad news for UK investors, including the Scottish Mortgage Investment Trust.
As one of Britain’s most popular investments, the trust has long provided investors with an easy way to support businesses in Silicon Valley and beyond.
Reversal: As technology plummeted, stocks in the ‘old economy’ – including energy and banks – rose, giving London’s FTSE 100 a boost
But while its long-term performance has wowed customers – tripling their money in five years – its stock price has now fallen 23% in two months.
It was a similar story for other popular tech-heavy funds, with Baillie Gifford American losing 25% in the same time frame.
Richard Hunter, head of markets for investment platform Interactive Investor, attributes the tech crisis to a familiar theme: inflation.
He says large investors are increasingly worried that persistent inflation will force central banks to toughen policies to control the economy.
More importantly, it could mean that the US Federal Reserve is raising interest rates faster than many had expected.
On Monday, investment bank Goldman Sachs revealed it now expects four rate hikes (in the United States) this year, up from three last month. “Since many large tech companies are trading at very high valuations, they are particularly sensitive to rising rates,” says Hunter.
This is because the stock prices of companies like Tesla and Amazon are based on expectations of future earnings.
A large sell-off in tech stocks – which started last week and continued on Monday – rocked U.S. stock markets
If higher interest rates make money more expensive, expected profit margins will drop, causing the stock price to fall today. This explains why several of the big tech companies have fallen in recent months, with Tesla and Amazon now down 13.97% and 12.62% since November.
As technology plummeted, stocks in the “old economy” – including energy and banks – rose, giving London’s FTSE 100 a boost.
“The current rotation period has inflated stock prices in areas where rising interest rates and inflation can benefit the business model,” adds Hunter.
He quotes Shell, Barclays and Lloyds. Over the past month, they gained 8.54%, 16.34% and 19.35% respectively.
And now travel stocks, the sector worst hit by the pandemic, are showing signs of recovery.
With the government confirming the end of pre-departure testing (a scarecrow for airlines), easyJet and IAG are up 24.97% and 25.65% in the past month.
So, should these latest twists encourage retail investors to rethink their portfolios?
As always, it’s important to keep things in perspective. Swings like last week’s massive sell-offs used to be a hit, but they also tend to balance out over time.
For this reason, Hunter warns investors shouldn’t be in too much of a hurry to get rid of tech assets they might own.
Investors who have held up particularly well to the tech boom of recent years might want to check that they are not overexposed to the sector.
But investors who have weathered the boom of recent years particularly well might want to check that they are not overexposed to the sector.
Platforms like Hargreaves Lansdown and Charles Stanley offer free guides and tools to help clients understand where their money is being invested.
“Now might be a good time to build the resilience of your portfolio and stay away from stocks with a high degree of exuberance and speculation,” said Rob Morgan, investment analyst at Charles Stanley.
He names the Ruffer Investment Trust as a solid option for investors looking to ensure their portfolio is prepared for a possible downturn. In addition to a wide range of stocks and bonds, the trust also invests in options designed to retain their value in times of uncertainty, including gold and derivatives.
While performances have been less remarkable than equity-focused funds (with £ 10,000 invested for five years for £ 12,500), its positions should hold up better if things go wrong.
For another option, Morgan cites the FTF ClearBridge Global Infrastructure Income Fund, a specialist fund that invests in large-scale infrastructure projects.
“The vast majority of the underlying assets are inflation linked, which means the fund should be able to continue to generate income in an environment of higher inflation,” he said.
Over the past five years the fund has turned an investment of £ 10,000 into £ 16,100. While considered a higher risk investment (due to its narrow focus), it can help investors ensure that all the bases are covered in times of uncertainty.
As for funds that will benefit from continued rotation into the ‘old economy’, River & Mercantile’s UK Dynamic Equity fund is looking for undervalued companies across the FTSE, with large holdings in energy and banking.
Meanwhile, Ninety One’s UK Special Situations fund has significant stakes in easyJet and Jet2.
In five years, the two funds transformed £ 10,000 into £ 12,800 and £ 12,100 respectively.
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any commercial relationship to affect our editorial independence.