Reflecting on March: Tech sector under scrutiny

Mark Nelson reviews the poor performance in tech stocks in March, including the causes of the weakness and important things to consider going forward

The tech sector comes under pressure

What has happened?

US stocks markets fell in March for the second consecutive month. Having pared February’s losses during the first half of the period, the second two weeks were marked by sharp declines, particularly in the technology sector, with the tech-heavy NASDAQ closing 6.9% below its March peak.

 

Why?

While broad US stock market declines can be attributed to concerns over economic growth borne out of a deterioration in economic data and the beginnings of a US-China trade war, the underperformance of the technology sector was driven by a number of individual stock concerns. Amongst them, Facebook shares came under pressure on the back of revelations concerning a “grab” of up to 87 million users’ data that occurred in 2014. The data was subsequently used by a company called Cambridge Analytica to build an algorithm to target individuals and “predict and influence choices at the ballot box”. Elsewhere, electric vehicle maker Tesla saw its credit rating downgraded by Moody’s due to production delays for the Model 3 and the rate of the company’s operating cash burn.

 

What should you take away from it?

Killik & Co Research look for opportunities in companies that stand to benefit from exposure to long-term structural growth opportunities, as well as high-quality businesses with competitive moats that should be able to perform well through the cycle. There are a number of technology companies that play to these themes and that we continue to believe have significant growth potential. That said, we are also a firm believer in the benefits of diversification and have identified a wide range of stocks across sectors other than tech, including financial, industrial and commodity companies, that also fit our investment criteria. To discuss any of our ideas in more detail please speak to your Investment Manager.