CFS Market Insights: Have tech shares passed their peak?

Welcome to CFS Market Insights. Today we're going to talk about three subjects. We’re going to talk about technology stocks. We're going to talk about investing in emerging markets (and in particular China). And finally, how we're positioned given some of the volatility that we are seeing in markets currently.

So we have seen a bit of a pickup in volatility in equity markets, which is really being driven by the technology sector and some concerns about valuations, and also the future growth prospects of large tech companies. What you've actually seen is that tech earnings in the last quarter in the US have been pretty strong. And announcements have actually driven share prices higher initially.

However, what we have seen is that the reaction has become a little bit more muted in recent weeks. Nvidia is a really good example of that - produced very strong earnings indeed. And in the aftermarket following their report, the stock was up about 5%, but the following day gave all that investment performance back.

Even with some very strong results out of these types of companies, the lofty valuations, so for example some of them are trading at 30 times forward sales, we think are possibly going to be hard to sustain in the medium term. And so markets are questioning the sustainability of the very strong growth that we have seen. One other thing that we have paid attention to is that the credit default swaps, which is essentially insurance that investors can buy over the debt of companies, for some of the major tech names have widened out. And that's really signaling some concerns about balance sheets and the funding of these significant investments going forward.

So what we may be seeing is that we're sort of moving past the euphoric phase of a bull market in the technology stocks. Pullbacks can be temporary or can be more prolonged, but they're just a normal part of market cycles. We think we've positioned our portfolios well for any pullback in those large cap technology stocks through the diversification that we've made, both into smaller companies and also into emerging markets.

Over the last 12 months, we've made a notable increase in our allocations to emerging markets, including China, driven by what we thought were very attractive valuations and also improving economic performance.

Year to date. China's share market is up over 20%. And Hong Kong, which is obviously allied to China, is up over 28%. Supported by both recovering valuations and ongoing economic performance.

Notwithstanding the fact that you've already seen some strong performance from these emerging markets, we do think valuations remain very compelling, particularly compared to developed economies. So our increased exposure to emerging markets across our portfolios is very much a reflection of our confidence in the long term growth opportunities. And that's very much benefited our members over the last 12 months.

A recent trip to China has very much emphasised that the focus there is no longer just about producing cheap goods. Many companies have moved further up the value chain, which is actually increasing their profitability. Today, we see innovation on the ground, from driverless taxis to advanced robotics and competitive consumer brands. Chinese companies are very much developing, servicing, marketing and distribution capabilities that rival those in developed economies.

Finally, I just want to talk about the increased volatility that we've seen in markets in recent weeks. After three years of strong double digit returns, some volatility is perfectly normal and perhaps to be expected.

We do see this as a bit of a healthy adjustment in prices, not a cause for alarm. We have a strong focus on diversification at CFS, and we believe that that helps cushion portfolios during market movements. Recent moves in Bitcoin, for example, which has fallen 36% from its peak just six weeks ago, reinforce that not all assets provide reliable diversification. By contrast, gold has been pretty much flat over the same period.

So despite the increased market volatility, members have enjoyed another very strong year of returns, well ahead of long term averages. We look forward to sharing the details of what's happened in 2025 in the future. At CFS, our approach remains disciplined. Diversified portfolios, active risk management and a focus on long term outcomes are very much at the heart of the way that we invest.

Thanks for watching CFS Market Insights. See you next time.