Barclays Wealth CIO warns investors of another Big Tech sell-off

U.S. big tech stocks saw a major global market sell-off in September, with the major reason being higher real interest rates, according to Barclays Wealth CIO Will Hobbs.

Real interest rates remove the effects of inflation to show the real cost of funds to the borrower and the real yield to the lender or investor(s). They are a measure of interest rates.

“One of the theories around the current context for markets is that a lot of it is quite dependent on ever-lower real interest rates, because if you think about the valuation of some of these tech titans, think about the shape of their cash flows, they’re sort of like long-duration bonds,” Hobbs told CNBC during a telephone conversation last week.

The Nasdaq which generates nearly 40% of its overall value from technology stocks, dropped more than 5%, while the S&P 500 fell almost 4%.

September was the months for a lot of tech activities, with money companies doing their initial public offering (IPO). There was also increased price activity in the stock market as shares of Big Tech – Amazon, Apple, Microsoft, Google, Netflix, and Tesla drove much volatility in the market.

Since the market crash in March—in the wake of the coronavirus pandemic—these stocks have outperformed the market, as consumer demand for their services increased. This happened despite the many uncertainties surrounding the pandemic and its further impact on the economy.

“The industry has been long obsessed and investors are understandably obsessed with the idea that you can protect downside and capture equity upside – that is like the Holy Grail of investing,” said Hobbs.

In Hobb’s opinion much of tech growth stocks popularity—that is, those with higher and consistent cash flows with increased earnings and yearly revenue compared to their competitors—was as a result of the steady fall of real interest rates in recent years. He, however, doesn’t see an immediate rise in real interest rates. Therefore, Hobbs suggests that a move higher should be given consideration in the unprecedented policy environments created by global central banks.

While he expects another major sell-off in Big Tech, Hobbs admitted that some of these companies have greatly benefitted “economically or structurally” amid the pandemic. As a result, the impact of the pandemic helped them revamp their business models and put them in the best position to lead the restructuring of the corporate age.

“One of the big concerns I would have is that investors have allowed, or will increasingly allow, or are already allowing, their portfolios and their multi-asset class batch of investments to get sucked into an ever-smaller vortex of recent winners, from gold to tech titans to those kinds of names, in the assumption that the future looks a bit like the recent past,” Hobbs said.

With a change in regimes, Hobbs also shows how such changes affect regulatory tolerance, inflation, and real interest rates in most-sought-after investments like Big Tech and gold. He advises investors not to concentrate their portfolios or batch of investments on winners only, but to also “own some losers as well” to avoid any uncertainty in the future due to a regime changes.