Emerging Markets Face SATT Problem to Rival Nasdaq's FAANG WoesBy
Samsung, Alibaba, Tencent, Taiwan Semiconductor driving gains
Narrowness of the two rallies has UBS, Pictet, BNP concerned
The increasing gravitational pull of Asian technology giants such as Samsung Electronics Co. and Alibaba Group Holding Ltd. has investors concerned the group is developing the same outsized influence on emerging markets as the so-called FAANG group has been exerting on U.S. equities.
Samsung, Alibaba, Tencent Holdings Ltd. and Taiwan Semiconductor Manufacturing Co. together accounted for 32 percent of total gains in the MSCI Emerging Markets Index this year through Thursday, data compiled by Bloomberg show. Alibaba and Tencent each contributed at least 9 percent. That’s eerily similar for some to the phenomenon known as FAANG -- Facebook Inc., Apple Inc., Amazon.com Inc., Netflix Inc. and Google parent Alphabet Inc. -- stocks that’ve delivered 50 percent of the Nasdaq 100 Index’s gains this year.
“Fears of a major emerging-market information technology selloff do exist and are mainly derived from concerns over the U.S. Nasdaq index,” Geoff Dennis, Boston-based strategist with UBS Securities, said in a July 4 report. “Our U.S. strategist is still overweight in tech although he believes the ‘summer squall’ in the sector may have slightly further to run.”
FAANG was seemingly on every market participant’s lips in June as the Nasdaq 100 fell for the first time in eight months, including three of its biggest one-day declines this year, without much in the newsflow to warrant any such slump. The five big tech stocks were seen as a favorite among momentum trades that have been making a comeback even after the strategy suffered one of the worst years on record in 2016.
The “unusual outperformance” of growth versus value stocks for emerging markets, driven by earnings momentum in technology, will reverse in the second half of the year, Dennis said. Still, Tencent and Samsung remain in UBS’s top 40 picks for emerging equities, along with seven other tech companies, he said.
The Asian group is becoming more expensive, especially on a price-to-book-value basis, with a 77 percent premium to the wider index -- a 15-year high, Dennis said. That’s double the long-term average premium of 38 percent, he said.
Pictet Asset Management Ltd.’s Luca Paolini is also worried that a correction is coming after the MSCI Emerging Markets index’s surge. The gauge beat both the Nasdaq 100 and the MSCI All-World Index in the first half.
“If global equities do indeed witness a correction in the coming weeks, there are grounds to expect that emerging-market stocks’ outperformance will come to an end,” Paolini, London-based chief strategist with Pictet, wrote in a report.
Paolini downgraded Pictet’s view on technology stocks to single positive from double, as earnings momentum appeared to peak in May. He also suggested reducing holdings of emerging-market equities given the outsize technology exposure of the region relative to developed markets.
“For here and now, profit-taking in the Nasdaq and profit-taking in emerging technology as well is warranted,” said George Boubouras, chief investment officer with Contango Asset Management Ltd. in Melbourne. “Quite clearly over the past 12 and 18 months, the performance of technology has been so strong and significant that to expect the same return one year forward would be an unreasonable expectation.”
BNP Paribas Asset Management’s Guillermo Felices and Lydia Rangapanaiken in a July 4 report also said the rally in emerging-market technology shares is “overextended” at this point and the lender will wait for lower prices before adding further to their portfolios.