Tech stocks could see weaker sentiment

Social media and biotechnology stocks were hit on Wall Street following concerns by the US Federal Reserve that the segment’s valuations were overstretched.

The U.S. Federal Reserve Building stands in Washington.
Source: Bloomberg

Facebook and Yelp saw their share prices pull back thanks to the warning from US Fed Reserve Chair, Janet Yellen.

These dragged down the NASDAQ composite by 0.54% to 4,416.39, with the Biotechnology Index falling 2.3% and Global X Social Media Index ETF is dipping 1.1%.

The warning looks to be a move by the Fed to pre-emptively rein in investors from sectors where signs of potential bubbles are forming, to help prevent systemic risks or other ripple effects.

The Internet and social media sectors have already seen a bit of a sell off this year, some of their valuations are looking a bit toppish. Year-to-date, the Global X Social Media Index ETF has lost over 10.7%, while the BI Global Internet Competitive Peers Index is down over 3.4%.

This compares against the 6.7% gain by the S&P 500 and 2.9% increase by the Dow Jones Industrial Average over the same period.

Based on forward P/E ratios, some of the social media stocks are looking overpriced and hardly justified by their current monetization models.

Stock

Forward 12M P/E

Yelp

2,380

Twitter

485

Weibo

230

Pandora

110

LinkedIn

87

Zynga 73

Facebook

45

 

During Asia’s trading sessions, the spotlight on tech stocks is likely to prompt investors to review their own positions in the sector. This could see them taking profit on industry players such as Tencent, Naver and Yahoo Japan.

Ahead of the Singapore Open

All eyes will be out for China’s Q2 GDP numbers, where investors are hoping for further signs of stabilisation in its economy. The consensus forecast is for growth of 7.4%, same as Q1, which is the slowest pace in 18 months. There will also be Chinese industrial production numbers and retail sales growth figures for June.

There have been some encouraging signs so far, most recently with foreign direct investment picking up based on figures released yesterday, though export data last week was slightly disappointing.

With investors looking optimistic ahead of the release, we are calling for the MSCI Singapore  to open 0.15 points higher at 376.21.

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