Tech investors to prepare for impending uncertainty

Seema Shah, Chief Strategist at institutional asset management firm Principal Global Investors, has emphasised the need for investors to brace for instability in the technology stocks space.

Shah said that technology stocks had underperformed in the broad market and were considered collateral damage during the recent spike in bond yields. She recommended investors prepare for oncoming challenges for parts of the technology sector, as rates continue to rise in the next few months.

“Given tech’s stellar run (+252% since 2017, compared to 105% for the S&P 500 index), investors may be waiting for the other shoe to drop,” she said.

“As financial conditions tighten and pandemic headwinds ease, cyclical conditions become increasingly unfavourable for the sector.”

However, Shah also said the inequality within the sector was set to pose further challenges for investors to navigate.

“Certainly, in this environment, profitless firms, such as those represented by the Goldman Sachs Non-Profitable Tech Index, will struggle as profit margins are stressed further,” she said.

“Additionally, these unprofitable companies are particularly vulnerable to rising rates, as they derive almost all their present value from future cash flows.”

In contrast, Shah predicts the mega-cap technology firms including the FAANGS (Facebook, Apple, Amazon, Netflix and Alphabet (Google)) will be more resilient in the face of imminent challenges, due to their large cash flows, strong pricing power and notable earnings delivery.

“Investors have been rewarded by the “overweight tech” trade for the better part of the past decade,” she said.

“And while conditions for the sector are becoming trickier, strong companies with robust balance sheets and pricing power still have further to run. For the profitless ones, technically speaking, the period ahead may not be so pretty.”