The sell off on Wall Street isn’t resulting from investors deserting equities – it’s more a switching as investors move out of companies with stretched valuations (in the eyes of those investors) into more mainstream companies such as utilities, retailers, other consumer stables and even some financials.
Companies that pay a dividend and use technology in their businesses rather than create it.
Thursday night’s rout on Wall Street was the turning point – the way the Nasdaq kept falling all day, and then accelerated in the final couple of hours tells us that there was something of a capitulation among investors, insofar as some, but not all tech stocks are concerned.
The use of the word rout by some analysts and media, such as the Financial Times, wasn’t too far wrong in the biotech sector on Nasdaq. The losses were large and nasty.
From now on all rallies in this sector especially will be of the ‘dead cat’ variety.
Our market opened down 50 points at the start of trading Friday morning, as the overnight futures market had been tipping.
But that was merely a kneejerk reaction by local investors.There was really no need for the Aussie market to be down at all.
We don’t have a big tech sector on the ASX – and as we saw late last week, the local market ended up outperforming Wall Street.
But for now the henny pennies among our investors are having their panicky way, selling (and making money shorting if they are hedge funds).
But a hint to us in Australia? Nope. The UK and Japanese markets are studded with techs and biotechs, so they should also be watched as well, but our markets is all about banks and big miners, plus Telstra and the odd retailer, and some other companies, such as CSL.
Just look at what drove Wall Street and especially the Nasdaq lower – it was the biotech sector. The ASX doesn’t have a large roster of companies in this area like US markets do.
The 5.6% plunge in the Nasdaq biotech index and for the associated ETF on Thursday night, our time, was the final sign that the biotech and possibly the ‘net booms in US markets are over for the time being.
The overall Nasdaq was off 3.1% on Thursday night, so the losses outside the biotechs weren’t as steep.
The Nasdaq has dropped 7% from its latest closing high for the year on March 5 – so it is edging towards correction territory.
The sell off is dragging down the Dow and the S&P 500 because some of the big cap techs are leading stocks in those indexes and biotech and net stocks are studded throughout those markets as well.
The Dow and the S&P 500 are in fact quite correlated to each other, as we saw last Thursday and Friday, and then overnight Thursday. But Australia isn’t as tightly correlated to Nasdaq.
US biotech’s multiyear rally has grabbed the headlines because of the linking to medical breakthrough and wonder science, along with fat profit margins.
Along with hot areas of cloud computing and social media (Facebook, Twitter etc), the Nasdaq has been hot – valuations have risen sharply as money from private equity, hedge funds and big individual investors has driven valuations higher in one off funding deals, or IPOs.
But now the oldest adage of all – ‘what goes up, must come down’, has jumped up to bite the bulls on the bum and again remind them that nothing booms forever and its time for a breather (but take your profits first).
Biotech stocks soared into record territory in late February, notching up gains of more than 20% for 2014. But no longer, the gains are being eroded, and in some cases have evaported.
It should be pointed out that while the Dow and the S&P 500 have both recorded a series of new all time highs this year, Nasdaq is merely at highs not seen since before the previous boom collapsed.
With today’s fall, the Nasdaq biotech index is now down 2.2% for the year to date.
The sell-off Thursday night was most severe among small-to-mid cap biotechs, which have driven much of the action as investors, searching for the next runner, plunged into a succession of companies.
So a company such as Pharmacyclics, which has a cancer drug in clinical trials, saw its shares lose nearly 10% on Thursday night.
Gilhead Sciences, whose hepatitis C drug is being questioned by politicians and others over its high cost, saw its shares fall more than 7%, to add to big losses at the end of last two weeks. Alexion Pharma fell 7.5% and was the biggest faller in the S&P 500.
Two biotech companies floated on Thursday, and ran into the selling pressure – Cerulean Pharma lost 2.1%, and Adamas Pharmaceuticals a very nasty 12.4% slump.
More traditional tech stocks like Facebook shares lost 5.2% and Netflix was down more than 5% – both are more ‘net than biotech.
Despite that Facebook, Netflix, Tesla and Google shares have lost 5% to 20% in value over the past couple of weeks because they have been ‘headline stocks’ and have attracted attention from small investors.
The US sell off is going to burble on now for the next month or so, or even longer, but we in Australia shouldn’t really be concerned.
Our tech sector stocks are small in number and in fact, as we saw in the big bust 14 years ago when the tech and net bubble collapsed, Australia shares won’t be as damaged if the current negativity deepens. But kneejerk sell offs will still happen.
In fact our concentration on financials (the big banks) and resource stocks, should act as a form of ‘analogue’ protection.
And remember our resource stocks have been through a crunching correction last year, especially the once booking mining services and engineering companies such as WorleyParsons, Clough, Monodelpheous and ALS.
Many Australian companies are users of technology, not creators of products or processes.
Even those considered to be ‘techs’ such as REA Group, and Seek, Wotif, Carsales.com and Webjet – use the products of other technology companies to handle everyday operations – such as finding a job, buying a house or booking travel.
Our big miners such as BHP Billiton and Rio Tinto are using more and more technology (from other companies) in their businesses to cut costs – CSL is both a tech stock and an old fashioned pharma stock. CSL shares are higher at yesterday’s close of $69.69, than they were three months and six months ago.
Our big danger is a property related crunch which would stop the banks in their tracks.
So keep an eye on New Zealand where the property boom is more advanced and where there was a worrying 10% fall in house sales in March, according to the country’s real state industry.
The blame was placed on the Reserve Bank of NZ’s moves, taken in late 2013, to try and calm the property market by making it harder to borrow with high loan to valuation ratios.
Prices haven’t fallen yet, because the rebuilding of Christchurch is supporting them. But if sales continue to weaken, prices will follow.
