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A cathartic and healthy correction for US tech?

Khairani Afifi Noordin
Khairani Afifi Noordin • 5 min read
A cathartic and healthy correction for US tech?
There is ongoing digital transformation strength even in the face of macro pressures.
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Hammered by a slew of macroeconomic headwinds including historically high inflation, rate hikes and slowing economic growth this year, the tech selloff has left investors wondering whether there are still opportunities in the sector, especially amid recessionary concerns.

The tech-heavy Nasdaq 100 index and the Dow Jones US Technology Index are down 23% and 22.6% respectively as at June 8, on the back of macroeconomic headwinds. This follows a year of outperformance of tech companies, as it sees a meteoric rise in valuations up until late-2021.

Video-streaming platform Netflix is one of the stocks that are hit hard this year. Driven by pandemic-related trends, Netflix’s share price almost reached an all-time high of US$700 ($962.47) last year before plunging 67% year to date to US$200. Meanwhile, other tech giants such as Apple, Tesla, Amazon and Alphabet also took hits.

Richard Clode, Janus Henderson Investors global technology leaders strategy co-portfolio manager, explains that the weak performance of the technology sector to date has been driven by an ongoing dramatic reassessment of the valuations of unprofitable companies in the face of a rising rate environment and tougher growth comparisons coming out of the pandemic.

This then extended into broader profitable technology, after some of the exuberance of the past few years drove up P/E multiples to elevated levels.

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Photo: Janus Henderson Investors global technology leaders strategy co-portfolio manager Richard Clode

“We view this as cathartic and a healthy correction given animal spirits had gotten out of hand. Underlying technology adoption trends remain strong; most technology companies remain profitable and have strong balance sheets,” says Clode.

Seeing inflation as a catalyst for technology adoption, Clode says there is ongoing digital transformation strength even in the face of macro pressures as companies look to use resources more efficiently and save costs.

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“With the chances of a global recession rising, we remain focused on companies whose technologies deliver a clear return on investment, favouring corporate versus consumer technology, high-quality franchises,” he adds.

Meanwhile, DBS strategist Dylan Cheang says in his US equities report that the selling pressure on technology earlier in the year was based on the assumption that rising bond yields would translate to lower present value for high growth companies with low profitability from a discounted cash-flow perspective.

“Our long-term conviction call on technology-related plays did not pan out as anticipated in 1Q2022 as the rise in bond yields triggered the switch away from sectors perceived as ‘long duration’. But as investors increasingly ‘price in’ the trajectory of the US Federal Reserve (Fed) rate hike, we believe that the selldown in technology will bottom during 2Q2022,” says Cheang.

DBS’s optimism is two-fold. First, the technology space operates in a borderless world. Unlike traditional sectors, the tech sector is less impacted by rising energy and commodity prices. Second, earnings forecast for the sector remains upbeat, with consensus expecting 19% earnings growth this year, underlining the sector’s resilience, says Cheang.

DBS remains overweight on US technology, as well as communication services, consumer discretionary, healthcare and financials.

Meanwhile, Standard Chartered Bank’s chief investment officer of wealth management Steve Brice, acknowledging that tech earnings growth is under pressure, is adopting a “neutral” view on this sector within its global equities allocation.

“Our broad-based view is that we still expect decent earnings growth for the sector despite concerns stemming from higher interest rates and inflation. The way we look at it is that the majority of the increasing yields are already gone — so, it would be less of a headwind but not going to be a tailwind for tech. This is an area that on a forward-looking basis should do reasonably well but we do not prefer it,” says Brice.

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When can investors expect the next US stock market bull run, which would include some of the largest tech and growth stocks? Paul Ho, UOB Asset Management senior director, Asia Pacific equities, says it is unlikely in the short term. If interest rates keep going up and there is a chance of a US recession taking place, investors should expect a bit more pain before a relief, says Ho.

“It is impossible to figure out where the bottom is, but given the [current scenario] it is not going to happen soon. Perhaps there might be a chance for [a recovery] sometime later this year,” he adds.

Photo: Standard Chartered Bank’s chief investment officer of wealth management Steve Brice

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Cover photo: Bloomberg

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