There is still room for recovery in tech

Oksana Patron

19 December 2022

Despite a prospect of slower growth and possible recessions in some economies, there is still room for a substantial recovery for tech provided interest rates rises turn out to be less severe than currently expected, according to Fidelity International’s analysis.

However, much will depend on how badly the looming economic slowdowns would damage the future earnings of the tech companies but if earnings hold up then big tech may look very attractive at these levels.

The analysis said that the effect for the tech sector, which has led overall market falls this year and experienced much sharper drops than the wider S&P 500 Index which has fallen around 17% in the year to date, would not be ‘undone completely’ until interest rates rises begin to fall back again.

According to Fidelity, while the big tech names might benefit from a more optimistic macro conditions in the future, the unprofitable tech companies which were at the early stage and still relied on borrowing would face more challenges in the years ahead due to elevated borrowing costs which are expected to persist.

On the other hand, the US tech giant Apple was predicted to have a power to raise its prices due to its lower exposure to ad revenue in case of recession.

But, Google’s parent Alphabet, which might face some headwinds as a sharp recession could negatively impact ad spend, has a strong business in cloud computing which is less exposed to cyclicality which would altogether leave the company in a position where a milder downturn would still see it make gains.

In a similar position was Microsoft, one of the leaders in cloud computing, which was enjoying strong recurring revenue from its software as companies would be unlikely to ditch it even at more challenging times.

If not tech, what else is there that looks attractive?

Fidelity’s paper pointed to an interesting position of small companies, which have a tendency to suffer more during market sell offs, as they are generally in an earlier stage of development and are riskier for investors, but could rebound more quickly if there was a positive change in sentiment.

“Once again, much will depend on the shape of economic performance from here. Recession tends to hurt most those companies that depend on their domestic market and tends to create jeopardy for those small firms with only limited cash reserves to see them through periods of tough trading,” Fidelity’s analysis said.

Similarly, emerging markets and small economies were also often the first to feel the pain during the slowdown of global activity, given a strengthening US dollar which added to inflation in emerging markets, but prospects of easing inflation, the end of interest rate rises in the US in sight and dollar declines may put the emerging markets in a much better position.