"The Tech Rally Has Gone Too Far"

VIDEO: Premier Miton's Simon Evan-Cook says the tech rally of 2020 is reminiscent of the dotcom boom, but inflation could be a bigger threat

Holly Black 15 September, 2020 | 10:16AM
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Holly Black: Welcome to Morningstar. I'm Holly Black. With me is Simon Evan-Cook. He's a manager on the Premier Multi-Asset Distribution Fund. Hello.

Simon Evan-Cook: Hello.

Black: So, do you want to tell us, just briefly, what the fund does?

Evan-Cook: The Multi-Asset Distribution Fund, as the name suggests, is about paying an income distribution. So, really, what it's there for are those clients who want to get a decent level of income but specifically ones who want to grow it over the life of their retirement or whatever period of time they happen to be using it for.

Black: And obviously, income has been a big theme this year, but I might have thrashed that out as much as I can lately. So, let's talk instead about another of the big themes of the year, which is tech and just how far this rally can go.

Evan-Cook: Well, I mean, you say it's not necessarily to do with income, but it is to do with income, because obviously, if you're in tech, you're probably not an income because these types of companies simply do not pay a dividend. The simple answer is, how far can this go is – well, I can answer it two ways. One is that it can go a lot further. But the other way to answer it is to say that I hope that it doesn't because feels already like it's gone too far.

Black: So, you say you hope that boom doesn't continue. Is that because you can't justify investing in the sector?

Evan-Cook: That's exactly it. So, we can't justify investing in it, particularly in an income fund you can't because you just simply can't get the yield for doing so. But in our other funds we're not specifically investing in it, not in a big way anyway. And the trouble for us as managers is if we stand back and say, look, it's gone too far and it looks dangerously expensive, as long as that keeps going, then we're going to look a little bit sluggish in comparison to that and sure enough certainly that's been our story this year that standing back has not made us look particularly good. But for us that certainly rhymes a lot with what happened in '98 to 2000 when those who stood back looked, again, sluggish for a good couple of years or so. But when that reversed and when the last buyer had possibly bought tech, whoever was going to, but actually the stuff that was kind of considered boring and was actually on perfectly decent valuations, did very well for the next few years, and everything that was tech-based did badly for the next few years to the point where the noughties was kind of a lost decade for tech stocks, which is something that I think people have forgotten now given how well they've done over the last 10 years.

Black: Yeah, absolutely. So, I think another big theme for income investors is inflation. So, obviously, that eats into our income. But it's not quite clear whether we're going to get inflation out of this pandemic or deflation. What are your thoughts?

Evan-Cook: It's not clear at all, and I'd say, this is the real biggie in the investment world in terms of if you get this one wrong, then you could potentially be in a lot of trouble. As we currently stand and what has happened, it's been highly deflationary. Obviously if you lock down an economy and stop people going out from spending, from going out and eating, then that is a deflationary event. It slows down economic activity. So, from that perspective, deflationary (indiscernible). So, that's the kind of the quality growth stocks, the kind of consumer stocks and also some of the tech stocks have done particularly well. But obviously, the great unknown here is what's going to happen going forward, specifically with what monetary authorities and governments have done with borrowing a lot of money and effectively printing a lot of money and then firing that out at the general population. Obviously, we've got eat out to help out going at the moment; we've had furlough schemes; we've had in the US checks being mailed out to people. Those are highly inflationary in a way that QE wasn't 10 years ago because it's reaching people who will actually spend it.

So, for now, that remains one of the big risks that if you are simply following the stuff that's done well over the last two years, there is a risk that should inflation come back, that stuff will look very bad while all the stuff that has looked bad will look good. So, you have to be very, very wary of that. The way that we're dealing with it is just to go sort of 50-50. We're not predicting one or the other, but we've got a kind of best of both scenario. The trouble is, if you get one or the other, that can make you look a little bit sluggish, again as we have done. But I think over the longer term not putting all your eggs in one basket proves to be the more sensible strategy.

Black: Simon, thank you so much for your time. For Morningstar, I'm Holly Black.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk