Liam Dann 's Opinion

Business editor of the NZ Herald

Liam Dann: Tech wreck fears rise

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Traders' herd behaviour affecting high-growth shares, but correction may be for best.

New York Stock Exchange traders are working in top gear as the Nasdaq takes a hammering. Photo / AP
New York Stock Exchange traders are working in top gear as the Nasdaq takes a hammering. Photo / AP

Wall St stocks fell further overnight on Friday, adding to fears about a possible tech wreck.

The United States tech sector has taken a hammering and investor sentiment has turned against so-called "growth" stocks.

The tech-focused Nasdaq index has plunged 5 per cent in just over a week. It is down 8 per cent since its peak in early March.

Last year the Nasdaq climbed 38 per cent and there has been no shortage of commentators warning the sector was overheating.

But why are markets falling now? Why this month? What flicked the switch?

Valuations for big name stocks such as FaceBook and Twitter have been running a long way ahead of any kind of traditional fundamentals - that is, prospects of making a profit.

The rapid growth path of the last year or so couldn't be maintained indefinitely.

Yet the market trucked steadily on until 10 days ago when sentiment turned.

The reality is there is no specific cause for the timing of this sell-off.

The daily market reports have to pin the rises and falls on something, so they'll reference concerns about the Fed tapering process, US job numbers and China, Crimea or other macro-economic risks.

None of those things were materially better or worse last month than they are this month.

The recovery - snail's pace and stop-start though it may be - is more or less on the same course it has been for the past year.

The minor panic we are witnessing seems to be a classic example of herd behaviour on the market - at least among the traders.

Serious investors should hopefully be retaining a longer view. The internet isn't going to stop changing the world.

The stocks that are tipped to rule in their various market segments of the cloud are still following their own internal growth paths.

In New Zealand the threat of a tech wreck has some edge now because of the relative size of Xero to the market. Xero chief Rod Drury is in the fortunate position of having played down the significance of his company's soaring stock price on the way up so he can dismiss the recent fall with his credibility intact.

It has been quite a fall - down 30 per cent since March 10.

But as Drury points out, Xero doesn't need capital; it has the advantage of US$180 million in the bank after a capital raising last year.

So Xero doesn't have to worry too much about the market ups and downs for a couple of years. As long as the business keeps growing and the trend towards cloud computing continues, it still has momentum.

In fact a short cyclical downturn may aid Xero as it will make it harder for new competitors to raise capital and expand rapidly.

A share price at more moderate levels should also ease some of the unneeded media hype around the stock. Xero can keep on keeping on.

It becomes more of a problem for the local tech sector if the gloom starts to weigh on investor appetite for start-ups. What has been a promising pipeline of Kiwi tech firms raising capital and heading for market may be forced to pause.

If this change in sentiment is sustained it may drive investors back towards defensive stocks.

We may see some upswing in utilities and listed power companies.

That would be good news for some of those small investors holding shares in Mighty River Power and Meridian. Of course, if it does play out that way then the Government will have timed the asset sales process perfectly wrong.

That's not to make an ideological judgment about whether the state is better or worse off owning more or less of these assets. But running a sale process to an immovable political time frame has clearly put the seller at a disadvantage.

Meanwhile, what we hopefully won't see is any kind of serious slowdown in economic growth. Even in the US the selling has been heavily focused on tech and biotech stocks.

Falls on the wider market have been more moderate. Analysts have noted investors aren't yet flocking to gold as in the big panic of 2008.

In this country one would not expect the issue to weigh heavily on the Reserve Bank's equations, unless it were to continue and do serious damage to the US recovery.

The lack of rain in the Waikato and falling global dairy prices will be looming larger as reasons to delay rate hikes.

If the wider fallout from the tech sell-off is limited then this correction could be the best thing for the global recovery. It should bring valuations back into line with business growth projections - or at least back into the same ball park.

If the fevered buying of the past year had carried on unabated, investors would have been putting markets at risk of a far greater and more damaging plunge.

Here's hoping things settle down over the next few days, but brace for more volatility as the tech sector bounces down to a new and more sustainable value.

On Twitter: @liamdann

- NZ Herald

Liam Dann

Business editor of the NZ Herald

Liam Dann is the Business editor of the New Zealand Herald, overseeing all our business content in print and online. He has been a journalist for 20 years, covering business for the last 14 of them. He has also worked in the banking sector in London and travelled extensively. His passion is for Markets and Economics, because they are the engine of the New Zealand economy.

Read more by Liam Dann

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