![In just three years, FAAMG share prices have risen far beyond the major market indices. Amazon leads the way, up 206 per ...](http://web.archive.org./web/20170616083701/http://www.afr.com/content/dam/images/g/w/g/r/d/b/image.related.afrArticleLead.620x350.gwsc85.png/1497594563075.jpg)
Fool me once, shame on you. Fool me twice, shame on me.
That is the pervasive mood in sections of Australia's investment community after the so-called FANG (Facebook, Amazon, Netflix, Google) trade that has propelled global equities higher for much of the past two years appears to have stalled, if not begun to unwind.
It's been 17 years since the dotcom bubble burst. But for some investors badly burnt by that experience, the psychological wounds have not healed. To them the recent rise in tech stocks that look overvalued on some traditional valuation measures has always been confounding. And, to them, the rise in FANG has always looked like a case of history repeating. Or, to put it another way, a slow-moving train wreck.
So last week, when Goldman Sachs compared the biggest tech companies, which it lumped together in a new acronym FAAMG (Facebook, Amazon, Apple, Microsoft and Google) to those from the dotcom era, and concluded there were some concerns, it felt like vindication. A significant sell-off on Wall Street ensued, and talk that the bubble has burst soon resurfaced.
The reality, as always, is more complex than that.
"I would argue against the idea that tech stocks are in some kind of bubble," says Jacob Mitchell, chief investment officer at Antipodes Partners, a Sydney-based global equities investment firm.
"It's more about the broader issue of ETFs inflating certain types of assets. And I'd argue the markets are starting to confuse low share price volatility with low business risk."
Goldman's analysts argued low volatility in FAAMG stocks was a sign investors were "underestimat[ing] the risks inherent in these businesses", such as their exposure to the business cycle, the prospect that their dominance could be curtailed by government regulation, or by each other, as their business footprints increasingly overlap. Investors are treating FAAMG shares like more defensive consumer staples stocks, Goldman warned.
Sell-off modest
There may be a much simpler explanation for the mini tech sell-off, which so far has been pretty modest in the scheme of things. (Over the past week, the US S&P; tech index has fallen about 4 per cent. It is still up 33 per cent over the past 12 months).
Namely that FANG (or FAAMG) trade is crowded.
"If you are thinking about it from a psychological perspective, many investors are overweight tech and sitting on large profits," says Alphinity Investment Management portfolio manager Lachlan MacGregor. "It's the most crowded sector, that crowding leads to some pretty extreme behaviour."
Most observers agree the fundamentals underpinning current tech valuations are, broadly speaking, much stronger than they were at the turn of the millennium.
There are corners of the technology universe – alternative currencies, unlisted start-ups – exhibiting many signs of irrational exuberance.
Yet among listed stocks it is more complicated. Mitchell, for example, describes Facebook and Google (Alphabet) as "strong businesses", and says the "jury is still out" on Netflix, but warns that chipmaker Nvidia is exhibiting low volatility for a business with cyclical characteristics.
"That's where the dangers are starting to build," he says. "We have seen this before. It becomes a momentum trade, money starts chasing a concept rather than the characteristics of the underlying company. Clearly some of these tech stocks are not low volatility businesses."
The next test will be quarterly earnings season, which gathers pace over the next few weeks. Adobe, Oracle and Blackberry are all slated for next week.