Tracking the dramatic increases in stock prices of global technology companies is of vital importance not just for individual and institutional investors but for countries and their sovereign wealth funds. And even for pension and investment funds.
To make sense of all this, we need to first look at the significant inflow of funds into the listed shares of these tech firms, and second, the impact of such investments on other sectors in the US and beyond, given that most of these systemically important tech firms are primarily based in the US.
Two factors have contributed to the surge in their stock prices. The first is the US Fed’s long-running quantitative easing policy, which involved the printing of nearly $4 trillion since the COVID-19 pandemic. This influx of liquidity lacked adequate investment avenues, thus primarily flowing into tech company stocks and causing their prices to multiply.
The second and more significant risk is the substantial flow of foreign investment into Wall Street, aimed at securing large and rapid profits. This influx, often driven by the well-documented herd behaviour that investors are known for, can result in significant capital losses for countries that urgently need to channel funds into their own development projects and job creation. Such shifts have considerable impact on economies, particularly for emerging economies where both private and public sector investments are crucial.
Speculators further inflate stock values, attracting even more investors and frequently altering the market value rankings of tech firms. Last week, Nvidia overtook Microsoft as the top-ranked company after its market value soared by $2 trillion within just this year, to $3.34 trillion. However, its value has dropped by a whopping 12.9 per cent - and $430 billion - over the past three days.
While these companies dominate the markets and have immense prospects due to their innovative work in areas including AI, the escalating share prices must at some point align with the financial health of these companies.
Building a bubble?
Currently, there is a clear disparity between these factors, raising alarms about a potential bubble that could threaten not only the largest economy in the world but the global economy too. This scenario mirrors the 2008 US mortgage crisis that triggered the global financial meltdown, the effects of which are still felt and remembered today.
It is noteworthy that some Gulf and Arab sovereign and investment funds hold significant stakes in these US tech companies. These investments have surged, especially after one Gulf entity realized profits of $7 billion at the onset of these share price rise, enticing others to follow despite the potential risks associated with such speculative investments.
Let’s be clear, investing in high-tech companies should not be ignored, as they represent the future. Yet, caution is an imperative. Investors should continuously monitor their investments and assess potential downsides. They should also have an exit strategy in place to withdraw at the right time. Institutions are advised to set a fixed percentage of their total investments for purchasing shares in tech companies, ensuring they do not exceed this limit to mitigate risks.
The potential for overcoming a new economic bubble exists if the US economy continues its relatively high growth rates. Expected interest rate cuts this year and next could further bolster stock markets. The upcoming US elections may also impact financial markets and investment trends, influencing the broader economic landscape.
