The rise and rise of the so-called FANG stocks seems to have been a one-way bet pretty much since the Global Financial Crisis (GFC) ended.
The collective value of the digital giant cohort of Facebook, Amazon, Netflix and Google — or more correctly its parent Alphabet — has quadrupled in the past five years.
In early 2013 they were valued at a smidge under $US500 billion ($650 billion).
That had doubled to ($1.3 trillion) by mid-2015. Another two years on and that 2013 value had trebled to ($1.9 trillion).
A week or so ago they had raced through ($2.92 trillion). Then things unravelled.
It may not be the tech-wreck of almost two decades ago when the Nasdaq shed 80 per cent of its value between March 2000 and September 2002, but there is a distinct hissing associated with a deflating bubble.
The Financial Times’ John Authers described the overnight performance of big digital companies as “the worst one-day loss by the group in history” and he had a point.
John Authers tweet
The FANG+ index — a collection of the Big Four, plus Apple and five other digital darlings — tumbled 5.6 per cent, its steepest decline since being created in September 2014.
Regulators and taxmen closing in
The Nasdaq fell by 3 per cent, which was hardly surprising given the FANG stocks, plus Apple, now account for roughly a quarter of its entire value.
Facebook’s uncomfortable position in the crosshairs of regulators and lawmakers over the release of the personal data of 50 million of its users made it a target of the selling. But it was not hit the hardest:
- Twitter -12pc
- Nvidia -7.8pc
- Netflix -6pc
- Facebook -4.9pc
- Alphabet -4.6pc
- Apple -2.6pc
Nvidia has been the best performing chip-maker on the S&P 500 over the past year but tumbled after announcing the suspension of self-driving tests in the wake of the recent Uber autonomous vehicle fatality and worries about Tesla’s production schedule.
“Investors are clearly worried that we may be about to see a regime change in regulation,” Luca Paolini, chief investment officer at the London-based Pictet Asset Management, told the Financial Times.
“History tells us that when a company or sector becomes dominant, it tends to attract the attention of either the regulator [US] or the taxman [Europe].
“And today the value of many tech names is based almost entirely on intangibles like reputation and brand, so regulation can have a huge impact.”
Hedge funds getting edgy
Goldman Sachs has voiced concerns for some time about the market’s heavy reliance on the FANG+ brigade, pointing out in June last year they not only represented 13 per cent of the S&P 500, but more than 40 per cent of the market’s growth.
The big investment bank more recently pointed out FANG stocks were the most “crowded trade” on Wall Street, with Amazon, Facebook and Google three of the top four most widely held shares in hedge fund portfolios .
That is terrific when they keep going up, but potentially very nasty on the way down given the “shoot first, ask questions later” reputation of the hedge funds.
In recent days Facebook’s 600 per cent five-year gain has been pulled back to a more modest 480 per cent. The others have followed, but not down such a vertiginous path.
FANG performances over 5 years
The Icarus Trade
Across the street from Goldman Sachs, Bank of America Merrill Lynch’s Michael Hartnett famously described the one-way bet on tech stocks as the “Icarus Trade” in 2015.
Mr Hartnett is not backing away from the statement.
“The lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets,” he recently wrote.
Mr Hartnett pointed out that the FANG group, plus eBay and Twitter, had seen their collective value increase by more than 600 per cent since the GFC, making it the third largest asset bubble in the past 40 years.
“Assuming [there is] no major drop in the six constituent stocks — the e-commerce bubble is set to become the ‘largest bubble of all time’ over the next few months,” he said.
That lofty title is now a bit further out of reach.
If the hissing becomes a pop, the FANG+ group may be consigned to history as just another ordinary, every-other-decade bubble.
The question is though, just how many billions more will be shed along the way.