Investors have become intensely focused on technology stocks and are willing to ride their upward trajectory without considering underlying valuations, resulting in irrational behaviour when companies report bad news, according to an Australian shares portfolio manager.
Schroders head of Australian equities Martin Conlon said the United States technology sector is currently a dominant theme and new developments like artificial intelligence (AI) have “infatuated” people, driving further interest in the sector, which people are not moving away from due to its high growth.
“Everything that’s worked for the last 10 years, people are still implementing those same strategies and same behaviours,” Conlon said during an online briefing, noting the focus on technology has grown substantially in the past six to 12 months.
“The one thing that is obvious is that technology stocks and the sector is going on with it and with the dominance of technology companies around the world, they are still putting prices up.
“The enthusiasm around cloud and AI is still providing enormous revenue strength for most of those companies and because investors are so used to momentum paying off, they are very reluctant to leave behind those behaviours.
“That tech dominance is re-emphasising that ‘more of the same’-type argument where people are used to the success of these stocks so they keep on implementing those behaviours and it’s similar to real estate in Australia where people are used to being on a good thing and they’re really not giving up on those things lightly.
“We saw this during the recent results season and if I were to summarise the trends, the winners won massively, the losers lost big and were treated pretty savagely with some very significant share price falls, but with very little attention paid to valuation levels.
“We are still seeing a situation where if you’ve got a good story, people can get excited about the growth runway over long periods of time and they are very reluctant to care much about valuation at all, so they will pay extremely high prices.
“Conversely, where there’s any semblance of bad news, the price suffers from downgrading and those expectations are severe and arguably an overreaction to a lot of short-term news as is often the case in stock markets compared to the enthusiasm seen with infectious long-term good news stories.”
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