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Watch FANG stocks for warning of Fed mistake, says Julius Baer

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If the Federal Reserve tightens US monetary policy too far, investors in the bull market's biggest winners will feel the pain first, according to Bank Julius Baer & Co. That's tech stocks.

[HONG KONG] If the Federal Reserve tightens US monetary policy too far, investors in the bull market's biggest winners will feel the pain first, according to Bank Julius Baer & Co. That's tech stocks.

Strong economic growth will encourage the Fed to keep raising interest rates, even if the tightening sucks out more liquidity than financial markets can tolerate, said Yves Bonzon, chief investment officer at Julius Baer. That could drive the S&P 500 Index down about 20 per cent before the equity losses start moderating the central bank's actions, he said.

"I'm the most nervous I've been in a long time because I think we're approaching that point," he said at a press roundtable in Hong Kong on Monday, referring to when Fed tightening starts to drive a reversal in stocks. "The biggest beneficiary of the expansion of liquidity will be the biggest casualty, irrespective of their fundamentals."

Mr Bonzon says that the interplay between economic data and the share prices of the FANG stocks - a loose grouping variously consisting of Facebook Inc., Apple Inc., Amazon.com Inc., Microsoft Corp., Netflix Inc., and Google parent Alphabet Inc. - is his favoured way to gauge whether liquidity conditions pose a risk to the broader market. The Swiss private bank has been reducing its holdings of US stocks, while remaining "modestly overweight," he said.

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While the S&P 500 has powered to a string of all-time highs this year even against the backdrop of Fed interest-rate increases, the rally is facing a renewed threat from surging Treasury yields and the risk of economic fallout from the US-China trade war. The NYSE FANG+ Index topped out in June, three months before the broader market's current peak, and has fallen 13 per cent since then.

Mr Bonzon noted that regulatory measures targeting technology stocks were clouding his signal's effectiveness, both in the US and China. Facebook has been under fire after last month disclosing that as many as 50 million accounts were compromised in its worst security breach, while China's government has tightened its oversight of the video game industry to curtail device addiction among young people.

Julius Baer last year began to consider whether Chinese stocks should be a "core asset class" that the bank recommends to all investors, similar to US equities, according to Mr Bonzon. Recent developments have given him pause.

The bank is now assessing whether or not China's government is "still in favour of a market-based economy and private entrepreneurship," or whether it is moving back towards a more state-controlled, centrally-planned model, Mr Bonzon said. The latter may undermine the country's long-term success, making its stocks less attractive, Mr Bonzon said.

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