After a strong 2020 and bright start to the year, tech stocks have endured a rollercoaster week. California-based electric vehicle giant Tesla is now down by 20 per cent on its January high.
Last year, Tesla was a lifeline for savers. It remains a major holding in several popular investment trusts — including Scottish Mortgage Investment Trust and Baillie Gifford US Growth Trust.
But its erratic performance has dragged down prices: with Scottish Mortgage down 20 per cent in a month.
Elon Musk’s electric car firm Tesla Tesla enjoyed a 700 per cent increase last year. Then last month saw a sell-off in tech stocks begin to gather pace and it plunged 20%
It’s been a rough week, too, for iShares Global Clean Energy ETF, another high-performing fund which – though not an investor in Tesla – has backed hydrogen power and other green technologies. The fund is now down 25 per cent in a month.
So what’s caused this change in mood, and is it time for investors to worry?
WHY DID TESLA PLUNGE?
As with all investing, it’s impossible to know exactly.
The venture by billionaire Elon Musk has long had its critics, who point to its sky-high valuation, narrow market share and unorthodox investments in technologies such as Bitcoin.
But that hasn’t stopped Tesla growing for years now: with a 700 per cent increase last year. Then last month saw a sell-off in tech stocks begin to gather pace, as investors bet on a return to normality.
Amazon and Apple, both of which thrived last year, are now down 7 per cent and 10 per cent respectively on last month.
The story for green-energy stocks, such as those underpinning the popular iShares Global Clean Energy, is even more dramatic.
Hydrogen battery developer Plug Power grew a massive 900 per cent in 2020, before doubling again in January.
It’s now lost nearly half its value in one month: making it look like a classic example of overexcited investors buying at its peak.
WILL IT RECOVER?
At least in Tesla’s case, a recovery may already be underway, with a sharp rise on Tuesday cancelling one third of its recent losses.
In many ways, what happened with Tesla and Plug Power was an example of speculation outpacing a stock’s valuation.
When shares rise so quickly it’s often a sign that buyers are betting on momentum rather than the company itself. Oddly enough, Tesla’s rise resembles what happened to another hot share some 20 years ago: Microsoft.
In the mid-1990s, Bill Gates’s fledgling computer empire was growing steadily, delivering a healthy annual return for investors.
As the world went internet mad, it quadrupled in value — before dropping 50 per cent when the famous tech-bubble burst.
Though many remained convinced of Microsoft’s fundamentals, the business took 15 years to match its 1999 high. It’s since grown 400 per cent, reaching an all-time high this year. But it took its time.
How about Scottish Mortgage, the trust which has been a portfolio darling for many retail investors?
With around a quarter of its money in Tesla, Amazon, Tencent and Alibaba, the trust certainly has the potential to feel more pain in a tech correction.
But Scottish Mortgage is currently trading at 11 per cent below the value of its assets – suggesting some investors may have been too hasty to sell off.
Trouble ahead: Looking at the performance of U.S. stock-markets in particular, there are signs of a wider correction
IS A CRASH COMING?
Looking at the performance of U.S. stock markets in particular, there are signs of a wider correction.
As tech stocks have fallen, companies hammered by the pandemic – including hotel chains and airlines — have been moving in the opposite direction.
But there are initial worries about the return of something more dramatic: inflation.
A sharp rise in bond yields – the return sought by investors for buying U.S. government debt – has led to predictions of an inflationary spike.
While central banks might be able to manage this through raising interest rates, it’s still a dangerous sign for shares, whose valuations can tumble as the cost of borrowing rises.
It’s another big uncertainty hanging over investors as the world continues its long march to normality.
AM I TOO EXPOSED?
It’s important to check the amount of overlap among your funds and trusts, particularly given the tendency for fund managers to back the same companies.
Of the top ten funds purchased by customers of Interactive Investor last month, for example, five invest in Tesla. In three of those, the stake is larger than 5 pc of the overall fund.
Baillie Gifford insists it remains confident in the long-term growth potential of its investments, and that it’s not worried about what it calls ‘short-term noise’.
The asset manager did sell off some of its shares in Tesla in the middle of February, reducing the allocation in several of its funds.
Meanwhile, back in September 2020, Baillie Gifford had been the largest external investor in Tesla, with a 7.7 per cent stake. That’s now around 2.8 per cent.
The Scottish Mortgage Investment Trust, run by Baillie Gifford, has also halved the size of its Tesla stake since December.
Again, the key here is exposure: when one particular share rockets, many investors believe you should sell some of your holdings to help re-balance your portfolio.
For the wider fundamentals of the market, experts warn against being overly-fearful of a sudden shock.
‘The expected rise in inflation doesn’t necessarily mean higher interest rates are on their way any time soon,’ says Susannah Streeter, a senior analyst at Hargreaves Lansdown.
‘So although there may be a correction in the short term, investors may feel the fundamentals of the growth companies make them worth hanging on to,’ she adds.
Source: Daily Mail