ISA investors buy the US tech dip

•    DIY ISA investors bought the tech dip in January
•    Fundsmith Equity and Scottish Mortgage prove popular despite a poor month of performance
•    ETF investors look to the UK
•    Share investors are banking on a travel revival

Laith Khalaf, head of investment analysis at AJ Bell, comments:

“ISA investors clearly weren’t put off by the fact that two of the most popular funds in recent years, Fundsmith Equity and Scottish Mortgage, saw a considerable downturn in January thanks to a sell-off in US tech stocks. Fundsmith Equity fell by 10% and Scottish Mortgage fell by 19%, as key tech holdings slumped over the course of the month. Of course, performance shouldn’t be judged over such a short period, and the exceptional track record of the managers of both Fundsmith Equity and Scottish Mortgage means they have an awful lot of credit in the bank, which explains why investors are looking through a temporary dip in form and continuing to back them for the long term.

“ISA investors weren’t just sticking with tried and trusted favourites though, they were buying into the US market dip. Purchases of L&G Global Technology Index, the Invesco NASDAQ 100 ETF, and Tesla, show ISA investors’ appetite to buy into the tech correction. This suggests there are investors willing to step in if tech stocks suffer a setback, which helps to keep valuations elevated, and goes some way to explaining why this sector has seen a bounceback in the last week or so. At a broader level, US and global funds remained popular, which again indicates ISA investors weren’t forced out of their natural rhythm by the market correction. 

“The strength and length of the US bull run has continually confounded those who have steered clear due to heightened valuations. The question facing the US stock market today is whether higher interest rates will prove to be the catalyst that cools the premiums placed on the US tech sector. But while US Treasury bond yields have been rising, at 1.9% on the ten year bond, they still sit at historically low levels. That could be interpreted as meaning there’s a lot of empty road ahead of them, but the market has already priced in a series of interest rate hikes from the Federal Reserve this year, so for yields to rise further, rate expectations would likely have to shift upwards again. Perhaps more tellingly, the yield curve has been flattening, which suggests markets are expecting slower economic growth in the longer term, partly as exit velocity from the pandemic wears out, and partly as interest rate hikes take their toll. So while US and indeed global funds remain exposed to high valuations in a concentrated number of technology companies, it still takes a contrarian mindset to bet against the S&P 500, which has performed so well for so long. 

“Some ETF buyers have been investing in UK exposure though, with the Footsie actually posting positive returns so far this year. For once a lack of exposure to the technology sector has proved to be a fillip, temporary or otherwise. Share investors also looked to unfashionable UK stocks within their ISAs in January, and in particular bought airline related stocks such as IAG, easyJet and Rolls Royce, as travel restrictions were lifted by the UK government. Both Unilever and Glaxo were popular buys too, as the former put forward a failed bid for the latter’s consumer healthcare division. Investors were likely drawn to Glaxo by the £50 billion tag placed on the consumer healthcare business, and they were probably attracted to Unilever by the sharp fall in the share price which followed.

“We’re now heading into the business end of the tax year when the 5th April deadline acts as a perennial catalyst for ISA investors to make the most of their allowance. The tax rises coming in April clearly make it even more of a priority for investors to shelter their savings from tax wherever possible. Those who are worried about inflation eroding cash returns, but also wary of the ups and downs of the stock market, might consider that they don’t need to invest their ISA as a lump sum. They can park it as cash and drip feed it into the stock market gradually, making for a smoother ride.”

Most popular investments with AJ Bell Youinvest ISA investors in January

Source: AJ Bell, most bought investments in the AJ Bell Youinvest ISA 31/12/21 – 31/01/22