Caijin

Are tech stocks turning frothy?

Exuberance a reminder of dot.com craze, but note the differences

Recently, my nephew told me that his colleague had quit his job to become a full-time trader after making $170,000 trading a little-known cryptocurrency known as ethereum.

That colleague had been working barely two years after graduating.

It reminded me of a story I read in this newspaper many years ago about a young civil servant who left his promising career when he made a small fortune trading a then fledgling stock, Amazon, as the dot.com craze swept through Wall Street.

As Mark Twain once observed, history doesn't repeat itself, but it often rhymes. Sure enough, when I look up the charts tracking the Nasdaq Composite Index between 1990 and 1999 as well as between 2008 and now, I find that the two charts tell a very similar story with the tech-heavy index shooting through the roof.

For a person lucky to get in early enough, it is a more fun way to make money than the tedium of a job.

As it is, in the past fortnight, investors here would have found themselves frequently waking up in the morning to news of the Nasdaq hitting fresh record highs overnight. It leaves us wondering as US technology stocks head north into uncharted territory, whether we may face a rerun of the calamitous slide in stock prices as the dot.com bubble burst in 2000.

Then, like now, some of the exuberance rubbed off on our local stock market, as "hot" money seeks higher-yielding markets to invest in.

The craze over cryptocurrencies such as bitcoin and ethereum is fuelling fears that a bubble is forming, involving another technology with huge potential - the blockchain.
The craze over cryptocurrencies such as bitcoin and ethereum is fuelling fears that a bubble is forming, involving another technology with huge potential - the blockchain. PHOTO: AGENCE FRANCE-PRESSE

In 1999, the local bourse was recovering from the Asian financial crisis, with the recovery spearheaded by bank stocks which had been bashed blue and black the previous years as jittery foreign investors fled the region.

It is almost uncanny to find that this time around, the rally in the benchmark Straits Times Index is again spearheaded by the three local lenders. This was on the back of the spectacular recovery from the battering they received last year, as concerns over their exposure to the beleaguered marine and offshore sector spooked investors.

Yet, for all the gains made by the three lenders, their performance is still eclipsed by the stellar performance put up by the world's largest technology stocks which an investor can pick up at the touch of a button if he has an online trading account.

The five biggest US tech stocks - Facebook, Apple, Alphabet (owner of Google), Microsoft and Amazon - alone have gained by over US$680 billion (S$925 billion) in value so far this year. That is equivalent to the combined annual economic output of Malaysia and Thailand - a sum not to be sneezed at.

In our backyard, Chinese Internet giant Tencent alone is worth HK$2.92 trillion (S$506 billion), or half of the market capitalisation of all the stocks traded on our bourse.

Yet, for all the superficial similarities between now and 1999, there are some key differences worth highlighting. This offers hopes that the eight-year bull market still has legs to run even though valuations may look stretched.

For one thing, today's tech companies are nothing like their 2000 counterparts, some of which were valued on silly yardsticks such as "eyeball counts" because they had no earnings or little prospect of ever becoming profitable.

Instead, the tech stocks now powering the rally on Wall Street are huge, profit-generating firms such as Apple, Microsoft and Google.

In Asia, equally impressive performances are being chalked up by firms such as Tencent, which reported a 58 per cent jump in profit to 14.48 billion yuan (S$2.9 billion) in the three months to March 31, and Alibaba, whose profit almost doubled to 10.65 billion yuan for the same period.

And the odds are good that as we find more and more uses for our mobile phones, the tech stocks which offer us these services will stay on the tear.

Just watch the chill that went down the spines of the world's biggest supermarket operators on fears that online retailer Amazon might be muscling onto their turf after it announced in June that it was buying upmarket grocer Whole Foods in the United States for US$13.7 billion.

Even the SGX-listed Dairy Farm, which owns Cold Storage and Giant Hypermarket, suffered a 2 per cent knee-jerk drop in its share price on the news even though Amazon and its proposed acquisition had scarcely a meaningful foothold in South-east Asia.

But if mainstream investors believe much of what the Internet had promised to deliver during the dot.com boom almost 20 years ago is now being realised, finally, then the craze over cryptocurrencies is fuelling fears that a bubble is forming involving another technology with huge potential - the blockchain.

Blockchain is essentially an online ledger which keeps a record of events such as messages and transactions.

But unlike most data which has to be kept in a physical location or a computer server, the blockchain is stored and maintained by a network of users.

This allows the network to run independently of any central authority at almost no cost and makes it impervious to fraud, since any changes to the database must be verified by all its users.

The blockchain was originally created to form the backbone for the digital currency bitcoin. But like all great human endeavours, its uses have proliferated as entrepreneurs find that they can raise funds by this means on the Internet by issuing "tokens" in what is known as "initial coin offerings" (ICO).

So far, the irrational exuberance appears to be confined to an arcane corner of the market. But the euphoria can be infectious and in some ways mirrored by the relentless manner in which investors have been chasing Internet giant stocks. Didn't the great investor Sir John Templeton once say that bull markets die on euphoria? But some market strategists claim that this time, it really is different.

Although ICOs sound similar to "initial public offerings" or IPOs in which investors buy shares when a company is listed, the two terms have nothing in common at all. ICOs are complex arrangements giving investors vague promises of a share of the services offered by the start-ups which sell them the tokens if they become successful.

ICOs are largely unregulated by market regulators and investors in them do not enjoy the same legal protection that they get from buying shares in a stock market. Also, ICOs usually collect their proceeds in bitcoins or ethereum, rather than in US dollars or other currencies.

That gives ICOs enormous appeal among enthusiasts who have made a big killing trading digital currencies such as ethereum, which has surged from US$8 to US$400 in less than six months, as they look for fresh venues to bet their winnings.

By some estimates, over US$1.3 billion has so far been raised via ICOs this year, half of it in just the past 30 days.

In Singapore, firms are reported to be using the blockchain platform to sell tokens backed by real estate.

The manner in which some ICOs have been able to raise millions - sometimes within minutes - reminds me of the dot.com craze. That they have been able to do so without a proper business plan is a further worry.

So far, the irrational exuberance appears to be confined to an arcane corner of the market.

But the euphoria can be infectious and in some ways mirrored by the relentless manner in which investors have been chasing Internet giant stocks.

Didn't the great investor Sir John Templeton once say that bull markets die on euphoria? But some market strategists claim that this time, it really is different.

A version of this article appeared in the print edition of The Straits Times on July 31, 2017, with the headline 'Are tech stocks turning frothy?'. Print Edition | Subscribe