Tech selloff an opportunity to build quality tech exposure

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Video:Deep Dive – What's next for the yen and Japanese equities after the selloff (7:28)
Watch for CIO's latest currency and equity investment ideas after this week's volatility spike in Japan.

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US equities closed lower on Wednesday, after early gains on reassuring comments from the Bank of Japan (BoJ) gave way to renewed concerns over the liquidation of yen carry trades and tech sector valuations.

The S&P 500 closed 0.8% lower and the Nasdaq index fell 1%, with data center server company Super Micro Computer declining by more than 20%. Earlier in the day, sentiment toward the yen and stocks was boosted by comments from BoJ Deputy Governor Shinichi Uchidia, who said that the central bank would not raise rates when financial markets are unstable. However, the market did not hold onto its early gains, and declined into the close.

That pressure carried through into Asia on Thursday, with pressure on the chip sector pulling indices lower. The Nikkei 225 is down around 1% at the time of writing, bringing its week-to-date declines to more than 3%, while Nasdaq 100 futures are down 0.3%. The FANG+ index, which tracks the top 10 most-trade tech stocks, is down 4% so far this week, as of 8 August, on track for its fifth weekly decline.

While some degree of calm has returned to the market, sentiment around crowded long tech trades has clearly become more shaky, and many have reached out to us for guidance on managing global tech exposure. We make several observations:

Tech fundamentals remain solid, in our view, while valuations have now reset lower. Second-quarter tech earnings were somewhat mixed, suggesting a normalization in growth. But stepping back, the fundamentals overall remain quite solid, with global tech tracking to report earnings growth of around 20-25% year over year in the second quarter. This normalization, in our view, will still mean sustained 15-20% earnings growth over the next six quarters. AI spending, meanwhile, looks resilient, with 2024 capex guidance for big tech rising to USD 211bn after second-quarter results, up from USD 202bn after first-quarter results. Global tech valuations have settled back down to around 22x 2025 EPS (earnings per share).

The speed and breadth of the selloff suggest technical factors were part of the story this week. The rapid unwinding of crowded global consensus trades—whether short yen, short volatility, long Japan equities, or long mega-cap tech—were likely exacerbated by illiquid August market conditions. It is difficult to measure the scale and flow of the carry trade, but it’s clear that the yen’s rapid appreciation from the early July high of 162 USDJPY to an intraday low of 141.66 forced some investors to sell assets bought with borrowed yen. A near 170% intra-session surge in the VIX implied volatility index on Monday, a spike far outstripping any pandemic or global-financial-crisis-era moves, suggests not just a flight to safety but also a squeeze on systematic and volatility-selling strategies.

The new market setup is reminiscent of past periods of tech outperformance. Looking back through 2015, bouts of Nasdaq index volatility that resulted in 10% mid-cycle corrections were historically followed by big gains in the six months following the trough. The current situation surrounding the ongoing correction in tech looks similar to the near 15% correction for tech in the third quarter of 2011. Back then, US macroeconomic and debt concerns were flaring up, second-quarter earnings were mixed, and the USDJPY was strengthening. This correction gave way to a 10-year run of structural outperformance for tech that really only ended in the fourth quarter of 2021.

So, while the volatility in tech has been dramatic in recent days, we think the global correction has uncovered structural opportunities across many quality tech segments. Investors may consider building balanced exposure in global tech, with a modest bias to internet and semiconductor names. Within tech, we like companies with strong balance sheets and a track record of earnings growth, as well as those that are exposed to structural growth drivers. Within the AI opportunity set, we continue to prefer the enabling layer of the AI value chain—which is benefiting from significant investment in AI capabilities—and vertically integrated mega-caps. Investors can also consider looking beyond the US for ways to capture AI growth, including in China’s tech monoliths, which may also offer some defensive exposure in current conditions.