Household name technology stocks have fallen dramatically this year. Pie Funds Founder and CEO Mike Taylor explains what could lead to a turnaround in this popular equities sector.
I’m writing this article from 18,000 feet up, on a regional flight within New Zealand. Why do I mention that? Well often, to gain some perspective on a situation, it’s good to get a view from above.
Starting at the end of 2021 and accelerating into 2022, tech stocks have fallen precipitously as rising interest rates and a slowing global economy have wrought havoc for investors. And there has been nowhere to hide, with even the popular FAANGM (Facebook, Apple, Amazon, Netflix, Google and Microsoft) all falling, some over 50%.
The Nasdaq Composite stock market index, heavily weighted in technology stocks, was down around 30% by July 2022.
But before we get to the recovery, it’s worth understanding if tech stocks were overvalued in the first place.
Covid-19 drove a surge
After a decade of strong performance, when the Covid-19 pandemic hit tech companies' profitability hit turbocharge. This was driven by consumers and businesses forced to work from home and shop online. You’ll probably recognise this from your own behaviour. You might have been using Microsoft Teams or Zoom programmes for the first time, and quickly these became part of everyday life. Brick-and-mortar retail stores may have quickly set up online shops using technology. At-home entertainment surged - who wasn’t watching increased hours of Netflix?
The market bid up valuations on the assumption we were in a new paradigm. Unfortunately, just as interest rates started to rise, so did the realisation that, although we’d shifted some of our behaviour, society as a whole wanted to get back to “normal”.
Where are we at now?
Fast forward to July 2022. We now know that although shopping online and Zoom meetings are great, we don’t want to spend our whole lives online.
The good news is that prices have now adjusted, valuations have returned to earth and, in many cases, tech stocks are relatively cheap.
So what am I looking for to signal the all-clear and return to investing in the tech sector?
Firstly, a peak in inflation and for central banks to say rate hikes are over for now. These will ease pressure on valuations.
Second, I want to see how earnings are tracking in an environment that’s tough for the consumer. If tech earnings hold up as I think they might, then that’s a big tick.
Lastly, I want to see a washout in sentiment towards the sector. And for this, I think we are already there. Tech has fallen so much that I’m seeing plenty of opportunities.
Therefore, while I’m still cautious, I think prices for the sector could well be higher in six to 12 months, although it will be bumpy along the way. For long-term investors, it might be time to start nibbling away at your favourite beaten-up names.
Information is current as at July 2022. Pie Funds Management Limited is the manager of the funds in the Pie Funds Management Scheme. Any advice is given by Pie Funds Management Limited and is general only. Our advice relates only to the specific financial products mentioned and does not account for personal circumstances or financial goals. Please see a financial adviser for tailored advice. You may have to pay product or other fees, like brokerage, if you act on any advice. As manager of the Pie Funds Management Scheme investment funds, we receive fees determined by your balance and we benefit financially if you invest in our products. We manage this conflict of interest via an internal compliance framework designed to help us meet our duties to you. For information about how we can help you, our duties and complaint process and how disputes can be resolved, or to see our product disclosure statement, please visit www.piefunds.co.nz. Please let us know if you would like a hard copy of this disclosure information. Past performance is not a reliable indicator of future returns. Returns can be negative as well as positive and returns over different periods may vary.