(Bloomberg) -- If the market's love affair with technology stocks turns ugly this year, investors may have to look hard for places to take cover, according to Morgan Stanley.
“Tech has the potential to be a pain trade for consensus in 2019,” strategists including Phanikiran Naraparaju wrote in a note dated Feb. 13, saying many investors are currently long the sector.
Complicating matters, Morgan Stanley's strategists said that hedges on tech stocks are unusually expensive right now, citing historically high volatility on the Nasdaq 100 Index. “Investors could benefit from looking at alternative hedges,” the report said.
Morgan Stanley is underweight technology globally. That's been a losing bet this year: The MSCI World Information Technology Index is up 11.7 percent since the start of 2019, the second-best performer among 11 sectors, while the overall gauge has gained 8.9 percent.
“While the Fed's dovish rhetoric last meeting is supportive of a rally in the near term, the year ahead is still challenging in terms of tough earnings comps, slowing growth and rising inflation,” the report said.
Buying calls that pay off if the U.S. dollar appreciates against the Korean won, which is currently at its least volatile in seven years, could be a good hedge given South Korea's importance to the global technology supply chain, Morgan Stanley said. The firm also recommended put spreads on emerging markets, which have higher exposure to tech than in the past and may thus be more sensitive to Nasdaq volatility.
A tech-centered sell-off might send markets into a rerun of the late 1990s, when correlation broke down between the S&P 500 and the Nasdaq versus benchmarks that are less heavily weighted toward the sector, such as the Russell 2000 and Euro Stoxx Index, the bank said.
To contact the reporter on this story: Gregor Stuart Hunter in Hong Kong at ghunter21@bloomberg.net
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Joanna Ossinger, Ravil Shirodkar
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