What should we mere mortal investors do about tech stocks? I’m slightly conflicted as I can see arguments on both sides of the fence. Valuations look a bit scary and the whole sector is clearly in a strong momentum driven trade (more on that below). But I’m also inclined to agree with those techno bulls such as James Anderson at Scottish Mortgage (see below) who argue that we’re only midway through a profound secular shift, with huge disruptive potential.

So, in order to make sense of what might be happening let’s look at some recent news flow on the tech sector from a strategic perspective. The first piece of evidence the recent results from Scottish Mortgage (run by James Anderson). I’m a long-term, happy investor and the interim results didn’t contain any great surprises. Over the six months to 30 September, the fund’s NAV rose 17.5% which compares with an increase of 2.2% in the MSCI AC World (total return in Sterling). Since the period-end, the NAV is up a further 6.5% versus a 5.2% rise in the MSCI AC World.

There were 75 holdings at 30 September, up from 72, although the portfolio remains concentrated, with 54% of the value represented by the top 10 investments. The fund currently has gearing of 7% of net assets and an active share of 95%. According to Numis’ report on the results “the emphasis is on disruptive growth and the managers, James Anderson and Tom Slater, highlight that the digital arena has come to be dominated by just six companies, three in China: Alibaba, Tencent and Baidu, and three in the US: Amazon, Facebook and Alphabet. All six feature among Scottish Mortgage’s top 10 investments. “ Other top ten businesses include Tesla, Illumina, Inditex and Ferrari (!). Crucially unlike some other investment trusts I can think of, the fund hasn’t (yet) been derailed by its private unlisted investments. In fact, its continued to add to these with new holdings such as Indigo Agriculture (analysis to increase crop yields), Lyft (Ride sharing), Eventbrite (online ticketing), and Vlover Health (healthcare insurance), while they have also made additions to several existing holdings (including Spotify and TranferWise). The proportion of the portfolio accounted for by unquoteds has remained broadly flat at 13% due to the strength of the performance of the quoted investments (the limit on unquoteds was increased to 25% of assets in mid-2016). This steady exposure to unquoted private businesses doesn’t seem to suggest a strong bearish view – many of these businesses will be richly priced on the hope of a follow-on IPO.

So far, positive. This week though brought one email to my inbox which immediately caught my attention. It was from research and ETF strategy firm Ekins Guinness and suggested that technical factors might be turning bearish. According to the report “the 20 Day Relative Strength Index for World Technology versus World Equities is at 83 and it has only been above 80 on four occasions in the last 20 years (one of which was in January 2000)” (see first chart below).

The report then went to observe that “the (longer term) 50 Day Relative Strength Index for the World Technology Sector versus World Equities is also high at 70, which is the third highest in the last 20 years” – see second chart below.

“In summary” Charles Ekins suggested, ” the Relative Strength Index is not the only, nor necessarily the best, overbought indicator. Other indicators are still supportive for the Sector but, when measurements become extreme, our Model reacts to them systematically and in this case, has started to reduce exposure to Technology”.

Yikes. Time to sell? Hold your horses and don’t sell quite yet.

Look East, young man says a big composite summary by analysts at HSBC.

They think that the big driver is technology in the developing world. In a report called ‘The EM Consumer Tech Symphony’, “across the EM world, smartphone adoption is much higher among younger generations but also rising more quickly. This coupled with the demographic shape of these countries suggests that as many as 2bn more consumers in EM could own smartphones in the next 3-4 years. More consumers in EM will be located in cities where tech adoption is higher and easier to spread. There could be 1.4bn new middle-class consumers by 2025, pushing the share of the world’s middle class located in EM to 80%”. The chart below bangs home the key HSBC message.

The HSBC report in particular looks at artificial intelligence and virtual reality as the next wave in EM. According to HSBC “rowing adoption rates for smartphones in EM will add to the rise of low-cost mobile based VR in these regions. Just like an individual in EM owning a smartphone today means that they gain access to the internet, e-commerce and global digital payments (all without a PC), over the coming years it will also imply they also have access to low-cost VR, by attaching their headphone to a low-cost headset. This could have transformative implications for EM. The autonomous and virtual era might see more accessible transportation, healthcare, drone deliveries of essentials, scalable education and allow for remote experiences that might not be possible previously. AI and VR could change the nature of goods and services delivered by consumer-facing companies and might refresh the dynamics for the supply-side and infrastructure frameworks in EM too. “

Back in the core mobiles segment, the HSBC report says “EM IT sector prospects may be enhanced by the potential to miss stages in the development cycle. One analogy lies with what has happened in the telecoms sector. In the developed world, progress was through fixed line to mobile. In EM, to an extent, fixed-line has been side-stepped and mobile immediately embraced. This could happen in a range of EM industries”.

But there is one final caution –  the tech giants might be too powerful “which raises the question of a potential change in the regulatory framework…. counterintuitively – between the two big geographical tech hubs (China and the US) – regulatory risk may actually be lower in China. “

Overall they conclude that “consumer-facing tech is currently the most exciting way to play the rising EM middle-class. It benefits both from rising middle-class numbers but also from the way in which the new millennial middle class behaves and transacts.”

My bottom line? I sense that the technology cycle may have further to run but we could be in for a short-term bit of turbulence – maybe even some profit taking. But the long-term trends do seem to be very much in place, with investors maybe redirecting new cash away from the big US techs towards the faster growing emerging market tech leviathans.