Monthly economic e-news – October 2020

06 October 2020

By Craig Turnbull  
Chief Investment Officer


Strong rally in US technology shares hits pause

Since the low point in March, the US share market has rebounded strongly. Fuelled by a rapid recovery in the share prices of key US technology companies, the S&P 500 recovered all its lost ground and surged to record highs.

However, the technology rally hit pause in early September and the volatility quickly spread to markets around the world.

Source: Yahoo Finance
Source: Yahoo Finance

What led to the recent volatility in technology shares?

The perception that the pandemic has accelerated the adoption of digital technologies combined with the liquidity created by government stimulus measures enticed many investors into the share market and boosted the price of technology shares.

Large US companies have been the main beneficiaries with Tesla shares up almost 400% in just five months to the end of August, Apple shares up over 120%, and Facebook and Amazon shares both up more than 80% over the same period.

However, with such a meteoric rise in share prices, particularly in an uncertain environment, there will always be spikes in volatility from time to time as investors take profits and re-evaluate risk across their investment portfolio.

Consequently, there was a sharp correction in the prices of US technology shares in the first few weeks of September. Tesla fell more than 20%, Apple was down around 15%, and Facebook and Amazon both down more than 10%.

While these falls have been steep, it’s important to remember that revenue, particularly for companies such as Apple and Amazon, has remained very healthy during the pandemic, and investors in these companies are still way ahead of the market lows of late March.

So, what about Australian technology companies?

In the US, Apple, Amazon, Microsoft, Alphabet and Facebook account for almost 25% of the total value of the S&P 500 index, while in Australia, the ASX 200 is still largely dominated by the major banks, miners, and industrial companies such as CSL.

Nevertheless, share prices for a number of Australian technology companies in data management, software and the booming ‘buy now, pay later’ sectors have experienced significant rises during the pandemic.

Household spending has been boosted by government stimulus and this has been one of the reasons behind the strong surge in the share price of Australian ‘buy now, pay later’ company AfterPay, rising by more than 700% since March.

Data has also become crucial for many companies navigating their way through the pandemic, helping to almost double the share price for data training provider, Appen, since March.

Meanwhile, the share prices for more established technology companies such as Seek and digital property company, REA, have not risen as sharply but they are regaining much of their value with the fall in the number of COVID cases and the easing of restrictions across the country.

What does this mean for super and investment returns?

The surge in the prices of technology shares has been good news for super fund members and investors, helping them to regain some of the losses that resulted from the sharp share price falls in February and March.

However, as the pandemic continues to have an impact on the global economy, investors are likely to experience some sharp market corrections from time to time.

So, if you are concerned about the current level of market volatility, it may be a good idea to have a chat with your financial planner.

Take a look at the latest LGS performance results.

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Markets at a glance

for the month ending 30 September 2020
 

 Australian shares down by 3.66% (ASX 200 Accumulation Index)

 10 year Australian Government Bonds yield down to 0.785%

 Australian dollar down to US$0.7108

noArrowRBA Cash rate steady to 0.25% 

 International shares down by 3.52% (MSCI – World ex Australia (USD)
 

The information on this website is of a general nature only and does not take into account your personal objectives, situation or needs. You should consider obtaining professional financial, taxation and or legal advice tailored to your personal circumstances prior to making any financial decision.