The National - What to do when hot investment trends go cold

As the bull market run of the past decade crashes and burns, its shooting stars are also falling back to Earth.

US tech heroes are among the biggest fallers, with Netflix's share price down by two thirds and Tesla dropping by a third.

Other high-risk, high-return investments such as Bitcoin, non-fungible tokens (NFTs) and special purpose acquisition companies (Spacs) have also felt the burn. As has disruptive tech fund manager Cathie Wood.

In 2020, her ARK Innovation ETF returned a rocket-fuelled 152.52 per cent, but it couldn’t last. So far this year, ARK Innovation is down 54.42 per cent.

Ms Wood is now closing one of her lesser-known offerings: ARK Transparency ETF, which has fallen 30 per cent this year.

It feels like the end of an era as inflation puts puts paid to more than a decade of near-zero interest rates and fiscal and monetary stimulus.

Markets expect the US Federal Reserve to lift base rates by at least 0.75 per cent this week, or possibly a whole percentage point.

Even the European Central Bank is hanging tough, hiking rates by 0.5 per cent last week to mark its first increase in 11 years.

When sectors crash, investors have a decision to make. Is the party over for good, or is this just a lull in the action?

In other words, should they sell or buy? So far this year, selling would have made sense. It may not now.

Last week, risk assets posted a shock revival. Bitcoin, for instance, was up 17.54 per cent in a month, bouncing from below $20,000 to about $23,400, although it was trading at $21,859.60 on Monday.

“The crypto recovery may be viewed as a healthy confirmation of the market normalising as market stress settles down,” Vijay Ayyar, vice president of Asia Pacific and global expansion at cryptocurrency exchange Luno, says.

The rebound has extended to shares, with Tesla up 15.09 per cent in a month and Netflix jumping 25.15 per cent. Even ARK Innovation is on the mend, up 16.55 per cent.

Investors sense that we are almost at peak inflation, Fawad Razaqzada, an analyst at Think Markets, says.

“There is some hope that we might see the end of aggressive central bank tightening as a result.”

The worry is that this is a dead-cat bounce - a short-term recovery after a major fall in stocks - and won’t last. Investors should not get carried away and assume Big Tech can carry on as if nothing has happened.

We live in a different world now.

Apple, Alphabet, Amazon, Facebook (now Meta Platforms), Microsoft and Tesla flourished on the back of the “extraordinary environment” of easy money, David Morrison, senior market analyst at Trade Nation, says.

“Borrow for nothing today, build the technology for tomorrow, that was the theory. Who cares about dirty old energy or some boring dividend payer when you can shoot for the moon with new technologies?”

Markets may think inflation has peaked, but that won’t stop the Fed from tightening.

“Higher borrowing costs are not great for tech growth stocks, so it’s going to remain tricky,” Mr Morrison says.

To recapture its former heady valuation, Tesla needs to add 56 per cent from current levels, while Meta needs to double, Mr Morrison says.

“Can it be done? Sure. By the end of the year? Maybe not.”

Investors need to rediscover an old skill. Patience. They can learn a lot from the dotcom bust in 2000, which sorted out the good companies from the bad. Pets.com and Boo.com died, while Amazon survived and thrived.

“Once this carnage is over, we’ll know what’s viable and what isn’t,” Mr Morrison says.

He suggests ARK Transparency’s closure could be a sign that the bottom is now in. So, could this be the tipping point?

It was the newest and smallest of Ms Wood’s nine exchange-traded funds, launched eight months ago and holding just $13 million.

By contrast, flagship fund ARK Innovation holds almost $10 billion of assets and has attracted inflows of $1.9bn this year, despite the market troubles.

ARK Innovation still has much to offer, Chaddy Kirbaj, vice director at Swissquote Bank in Dubai, says.

The fund targets specialist sectors such as cloud computing, energy storage, robotics, digital media, e-commerce and gene therapy.

“The digitalisation and technological transformation trends remain intact and this won’t change because of recent losses. These sectors will not only recover, but continue to evolve,” Mr Kirbaj says.

ARK’s funds face a worst-case scenario of “global rate hikes, the end of QE, skyrocketing inflation, venture capital funding reluctance and the food crisis”, he adds.

ARK Innovation’s holdings may have become overvalued and the fund lacks global diversification, with 93 per cent exposure to North America. Yet, it continues to hold what is “a very solid selection” of businesses, Mr Kirbaj adds.

“It has yielded an average annual return of 10.8 per cent since its inception in 2014.”

The Nasdaq index recovered after the dotcom crash, and so can ARK Innovation, Vijay Valecha, chief investment officer at Century Financial, says.

“Today’s disruptor companies have much better business models and the technology environment is far more favourable,” he adds.

In 2000, the internet was still at an early stage of development. “Today, there are almost five billion users globally and nearly a fifth have access to the super-fast 5G internet,” Mr Valecha says.

Superior tech infrastructure and new trends such as blockchain will spur innovation in artificial intelligence, automation, FinTech and genomics, Mr Valecha adds.

Just do not expect a return to the days of blockbuster growth.

“High-growth companies benefit from lower interest rates as the majority of cash flows happen in the future. When interest rates are higher, those cash flows are discounted, leading to lower valuations,” he says.

The real money will be made once inflation has been defeated and the major central banks turn dovish again, Mr Valecha adds.

Some investment themes crash and burn, but others rise from the flames, Laith Khalaf, head of investment analysis at AJ Bell, says.

Tech is here to stay, but the days of excessive valuations may be over.

“Investors may find share prices less buoyant in a world where the US 10-year Treasury bond yields 3 per cent, rather than 1 per cent.”

It feels like sanity has returned. Which can only be a good thing.