US tech shares reeling from double whammy

Facebook data breach scandal and fears of trade war send investors fleeing from sector

NEW YORK • Tech shares have taken a beating and investors are fleeing exchange-traded funds (ETFs) tracking the industry.

Since Monday, some US$2.5 billion (S$3.3 billion) has been yanked from the biggest technology-heavy ETF, the PowerShares QQQ Trust Series 1, better known by its ticker QQQ. Other funds are seeing similar outflows as well.

Meanwhile, the Nasdaq 100 is heading for its worst week since the early February correction.

The main trigger for the action appears to be the controversy over the use of Facebook user data by political advertising firm Cambridge Analytica. Shares of the social network have fallen more than 10 per cent this week, and if the decline holds, it will be the worst week for the stock since 2014.

Fears of a trade war are also mounting as US President Donald Trump slapped tariffs on up to US$60 billion worth of Chinese goods.

"The entire technology complex is worried about what (Facebook founder) Mark Zuckerberg said... that maybe we should be regulated," said Harris Financial Group managing partner Jamie Cox. "All of a sudden, you have all of these technology companies that are going, 'I can't believe he said that', because that would basically hurt technology companies' earnings potential."

The social media giants' problems are not the sole reason for the tech slide. There's also Mr Trump's China tariffs stemming from intellectual property violations. If China retaliates and a trade war erupts, US-based tech companies with operations overseas could suffer.

"Some of the parts are made in China, you have that relationship," said Prudential Financial chief market strategist Quincy Krosby. "As the Chinese economy picks up, the Chinese have more disposable income to enjoy technology."

Last year, 20 per cent of Apple's revenues came from China, according to Bloomberg data. For Intel, revenue from China was 24 per cent.

US-listed shares of Chinese companies are also feeling the heat. The American depositary receipts for Baidu and Alibaba Group Holding showed both Chinese tech giants under substantial selling pressure.

But the big news remains Facebook, which has been struggling since news of the data breach broke, as investors worry that the government could impose regulations on the entire social media industry.

The company's crisis has spread to the broader technology sector, as seen in Nasdaq's decline and outflows from ETFs that until recently had been Wall Street darlings.

Of the nearly 1,500 US equity ETFs tracked by Bloomberg, only eight funds have attracted more cash this year than QQQ. Indeed, it had its third-largest weekly inflow on record just last week. But since Monday, investors have been racing away from the US$63 billion ETF.

Facebook is the ETF's fourth-largest holding and Apple is its biggest. The other so-called FAANG stocks - Facebook, Apple, Amazon.com, Netflix and Google parent Alphabet - are also well represented in the portfolio.

BLOOMBERG

A version of this article appeared in the print edition of The Straits Times on March 24, 2018, with the headline 'US tech shares reeling from double whammy'. Print Edition | Subscribe