A prominent fund manager has warned over-inflated technology shares could sink 40% as the world recovers from COVID-19.
United States and ASX tech shares have staged a remarkable rally since the world was first struck hard by the virus at the start of the year.
The S&P/ASX All Technology Index (ASX: XTX) is up more than 120% since it hit the bottom in March.
Investors have climbed over each other to buy up shares like Afterpay Ltd (ASX: APT) and Temple & Webster Group Ltd (ASX: TPW). That's multiplied their prices 11-fold and 6-fold respectively since March.
The rally has come as governments and central banks around the globe have lowered interest rates and introduced stimulus to prevent an economic disaster.
WAM Leaders Ltd (ASX: WLE) lead portfolio manager, Matthew Haupt, said this pumps up the attractiveness of companies currently scaling up. But it can't last forever.
"The rate environment is incredibly low, and everyone's extrapolating this out for a long period of time," he said in a Wilson Asset Management video.
"We look at the tech sector as overvalued… Prices could fall 30%, 40%."
What will make the market turn against tech?
For Haupt, the mass deployment of a coronavirus vaccine will be a turning point.
This is because that will provide governments and central banks confidence to pull back stimulus and ultra-low interest rates.
He said economic crises are normally caused by a bubble, but 2020 is different.
"Everything's been put on hold, but there is no central bubble to deflate," he said.
"So if we can get fiscal policy kicking things along and monetary [policy] holding up asset prices, and we can recover out of this… 'low rate environment forever' will be proven to be wrong."
This disjoint will cause "big shocks" to the share market, according to Haupt.
Already the promise of two vaccines mean that the world is moving on from phase 1 (pandemic) to phase 2 (recovery).
"We are in phase 2 if the vaccine is here. But everyone's caught in phase 1 still," Haupt said.
"That transition will be quite painful for a lot of people."
WAM Leaders portfolio manager, John Ayoub, said the beneficiaries from this crazy year can't stay winners post-COVID.
"You can't put a multiple on this year's sales and this year's earnings. We'd heed caution on that," he said.
"Although people have suggested structural change has happened rapidly, as we know from the past, things don't happen that quickly."
Should you reduce tech in your portfolio?
Due to the inflation in tech share prices, even if you didn't directly buy any during the year, the chances are they are taking up a higher percentage in your portfolio now.
The Motley Fool last week spoke to several fund managers about what investors can do if they fear overexposure to the sector.
Multiple professionals said the nature of the individual tech shares matter.
"Tech shares come in all shapes and sizes, manufacturers, service companies, intermediaries, intellectual property owners, etc," Nucleus Wealth head of investments, Damien Klassen said.
"Show concern about your portfolio if you have too many growth and expensive stocks. But, tech shares aren't all expensive. For every Advanced Micro Devices Inc (NASDAQ: AMD) trading on 90 times last year's earnings, there is an Intel Corporation (NASDAQ: INTC) trading on 9 times."
Frazis Capital Partners portfolio manager, Michael Frazis, has done pretty well out of tech, but is now selling down. He's turning his attention to another fast-growing sector.
"We are dramatically reducing what little we have left invested in 40x revenue businesses," he told his clients last week.
"Longer term yields have begun to rise, tech valuations are at record highs, and we believe a period of serious multiple compression has already begun."