Technology stocks can notch further gains even as investors move beyond pandemic trades, according to Principal Global Investors.
Cheap borrowing costs and the growing importance of intangible assets mean that some tech firms can surge even amid a market rotation toward value and cyclical names, said Alan Wang, a portfolio manager at the global equities arm. The past year is proving to be a lesson in valuing technology companies the right way, he said.
“Never underestimate the impact of technology,” Wang, who helps manage about $507 billion of assets in Hong Kong, said in an interview. “We see a huge re-rating of new technology companies no matter if they are making electric cars, ventilators or vaccines.”
This year’s hottest trading strategy -- piling into technology stocks benefiting from stay-at-home trends -- finally took a breather this month as Covid-19 vaccine candidates showed promise. Beaten-down shares tied to activity in pandemic-battered economies became the leaders. However, Wang cautioned that investors may be discounting the ability of innovation-linked firms to navigate any downturn in sentiment, particularly in a low interest-rate environment.
At the same time, some of Wall Street’s biggest names are shaking up their investment models to evaluate if intangibles such as brands and patents can be treated as assets rather than expenses to gauge the value of a stock. “It’s a totally new valuation system. I can see a lot of investors getting their hands burnt by shorting high P/E multiple stocks,” Wang said.
Principal Global likes companies in the renewable energy sector, as well as data centers and tower companies. The company also prefers the tech-heavy Chinese and Korean stock markets in its multi-asset portfolios, while also building positions in Japanese and small-cap stocks.
And as the market snaps up everything cyclical, investors need to distinguish “value” companies backed by structural drivers from those rising purely on expectations of a vaccine, added portfolio manager Binay Chandgothia. Earnings at some energy and financial firms, for instance, are structurally challenged, he said.
“Get back into value when you believe the assets can generate enough earnings -- otherwise go back into the safety of technology assets that are benefiting from the way we live,” he said.