The rout in U.S. tech stocks may have been on idiosyncratic factors, but it will still take a swing at their Asian counterparts, Societe General said.
From a closing peak of 7588.33 set on March 12, the Nasdaq Composite had fallen nearly 7 percent by Thursday’s close at 7063.45. Markets in the U.S. were closed Friday for a holiday.
“The trigger for the rout may have been stock specific – customer data usage in the case of Facebook, suspending self-driving test programmes at Nvidia or it could even have been the escalating trade tensions affecting a larger group of tech hardware names – but we believe the concern is broader and lies elsewhere,” the bank said in a note dated Wednesday.
“In our view, the real concern is the extremely high valuation of the technology sector at a time of developed economies central banks’ policy normalisation. Tech stocks are ‘long dated assets,’ which are more sensitive to the level of interest rates than the rest of the market,” the note said.
Societe Generale noted that Asia’s tech stocks are highly correlated to the U.S. tech sector and to moves in the Nasdaq index.
“While Asia technology stocks have been more resilient than their U.S. peers since the Nasdaq peak, we however believe they are vulnerable due to their high valuations,” the note said, pointing to China’s tech sector, which trades at an internal rate of return (IRR) that is 1.5 percentage points lower than the broader China market.
How to play it
Societe Generale was sticking to its five-month-old call to reduce portfolio weightings of Asian and Chinese technology shares, both on valuation and central bank concerns.
Instead, in China, the note recommended going long on banks and short the MSCI China; “the regulatory tightening is shifting from the interbank market to shadow banking and non-bank lending, a bullish long term positive for China banks, which we expect to become a dominant contributor to earnings growth.”
In a similar vein, Societe Generale advised coupling a long position on the HSCEI, or Hang Seng China Enterprises Index, which is 70 percent financial stocks, with a short position on MSCI China, which is 41 percent technology plays. It noted that China bank earnings are expected to grow by 8-9 percent in the next two years.
It said it also still liked large emerging market Southeast Asian stocks, such as Thailand, Malaysia and Indonesia.
“These are low beta markets with improving domestic earnings growth and relatively lower correlation to falling U.S. equities,” the note said.
The bank also pointed to a strategy for Japanese shares, which it said is “for the brave only, or at least investors with a longer time horizon.”
It recommended Japan value sectors which don’t have direct exposure to U.S.-China trade tensions, such as banks, transportation equipment and factory automation stocks. It noted that these value sectors are near their lowest valuation for the past five years.