Peter Brown: Memories of 'tech wreck' weigh on growth stocks as Covid value seen elsewhere

Peter Brown: 'Higher corporate taxes are back on the agenda, which is traditionally not good news for stock markets, and the tech giants have the most money.'

The main US stock markets, the S&P 500 and the Dow Jones, are up since the start of the year, but the tech-rich Nasdaq is flat: Many of us who have got used to the outperformance of tech stocks, all the way back to 2009 in fact, this represents something of an upset of the natural order.    

Normally the markets have themes that drive activity. In 2020 it was a combination of Covid, the US election, and Brexit. 

All three of those have passed. 

Yes indeed, for the market Covid-19 is no longer much of an issue as the market looks forward to the rollout of successful vaccines and economic recovery. 

This has led to a significant change in outlook and investment strategy. Two themes now dominate for 2021 and beyond. 

So-called "value investing" is outperforming "growth investing", which includes tech stocks, and the "reflation trade".

Growth investing has lasted over a decade since the last crash in 2009 and investors have pushed tech stocks to stellar returns. 

Investors didn't need to look elsewhere. 

The S&P 500 rose 200% from 2009 to date - but many "boring" stocks got left behind, including financials, utilities, and energy companies. 

Now, however, it is widely accepted the US market and growth stocks specifically, are dangerously overvalued, and US stocks are now twice the price of a comparable company in any other developed market. 

The over-performance of the US market has been mainly due to tech stocks, of course, but also due to stock buy-backs which have overinflated prices and increased debt levels.

Value investing is the concept of always investing with a high margin of safety, the principle of buying a stock at a large discount to its intrinsic value. This provides high-return opportunities and limits downside risk.

But the market has ignored the concept of value investing for over a decade.

Some investors see it as a long wait for returns, while growth and momentum investing can offer immediate gratification.

However, the benefit of value investing is the protection against market corrections. 

Overvalued assets get hit hard by corrections, while assets that have a discount to intrinsic value fare much better.

Over the last decade or so, many sectors of the market have lagged as have geographical regions, banking stocks, utilities, energy, as well as commodities have all underperformed. 

The European markets have underperformed the US, and the UK has underperformed due to Brexit, which potentially means there is value everywhere. 

Moving from growth to value is now known as the great rotation. 

Overall, the markets are still underpinned by massive Central Bank and government supports around the world amid very-low interest rates. 

The investment is just concentrated on a different strategy, benefiting the Dow and the S&P which have a different mix of companies compared with the Nasdaq.

The other issue worrying tech investors is a potential policy shift from the administration of President Joe Biden. The amount of stimulus agreed in the US is huge by any measure. 

Higher corporate taxes are back on the agenda, which is traditionally not good news for stock markets, and the tech giants have the most money.

Overall, this rotation is driving certain sectors of the US market higher along with other value plays outside the US, but tech is not at the party. 

Tech stocks faced a similar crisis in 2000, known as the "tech wreck". 

From the time at which the Nasdaq hit its all-time high in March 2000 and the market low for the Nasdaq 100 in October 2002, was a period of roughly 18 months.

A value stock such as Berkshire Hathaway gained 27.6% during that period, while the Nasdaq 100, the growth market, lost 82.7%. Value outperformed so-called growth by over 110% during the period.

There is also the reflation trade: It's an investment strategy based on the prospect for growth after Covid and the industries that will benefit the most, as demand outstrips supply. 

Peter Brown, Managing Director at Baggot Asset Management. 

The US is likely to outperform the rest of the world initially and growth is expected to be double this year than that in Europe. This has led to expectations that inflation is set to rise. 

I could write forever on inflation. 

Regardless, the market is hyped again this time around and that has led to bond rates rising in the US.

In general, the US cannot afford interest rates to rise. It has a lot of debt to service, so a battle royal will ensue with the markets, who believe inflation will inevitably lead to a rise in rates, while the Federal Reserve is committed to keeping rates low.

This will cause jitters on the market and growth stocks could suffer. 

If the inflation genie really gets out of the bottle, tech stocks will get badly hit. 

However, as we know, value portfolios can and do thrive under these circumstances.

• Peter Brown is managing director at Baggot Investment Partners. He's at [e-mail]