Rotation out of technology stocks led a market selloff earlier this month, seemingly driven by investors’ expectations for a surge in bond yields, but some asset managers remain bullish on the tech sector.

The tech-heavy Nasdaq fell 2.26% on October 4, while the S&P 500 fell 1.38%. Longtime market leaders such as Apple and Facebook were hit the hardest, as they fell 2.5% and 5% respectively. Apple’s share price dropped 11% from its September peak, and Facebook fell 15%, putting both in correction territory.

Facebook’s social media platforms, including Instagram and WhatsApp, went dark that day, putting more pressure on its share price. The outage lasted more than six hours, extending past market close, making it Facebook’s longest blackout since 2008.

However, the S&P 500 has since bounced back. On Thursday (October 14), the index rose 1.7% to record its best day since early March — experiencing a broad-based surge in share prices of materials, health care companies and tech.

Inflation, interest rates and the pandemic continue to weigh on the stock market’s outlook, but asset managers noted that despite recent fluctuations, tech continues to have long-term prospects for investors.  

AsianInvestor asked investment strategists and fund managers whether the time is right to invest in US tech stocks, and what factors are guiding their advice.

The following contributions have been edited for clarity and brevity.

Joseph Wilson, portfolio manager
JP Morgan Asset Management

Joseph Wilson

We remain very constructive on the long-term outlook for the US technology sector and the expansion of tech into other sectors. While the pandemic has provided extreme motivation for enterprises to digitise rapidly, it was only the first step for many of these businesses.

For example, we are seeing a strong rise in a variety of cloud offerings for small and medium-sized businesses as the pandemic accelerated the innovation and demand for easier-to-use and less costly solutions.

These broader cloud solutions coupled with a more efficient advertising capability are opening new doors for direct-to-consumer business models and enabling a faster rise of new retail concepts. At the same time, the next generation of consumers have been raised with technology and have less hesitations to integrate digital solutions into their day-to-day. 

 The way we think about technology is less as a sector bet and more as a secular force that affects every corner of the economy, spurring shifts in market share and market capitalisation, and generating opportunities for wealth creation. Finally, while rising yields created some short-term volatility, this provides opportunities for investors who want to have exposure to secular growth companies with better profitability and robust business models.

Alan Tu, portfolio manager 
T. Rowe Price

Alan Tu

Despite a demanding backdrop, we are pleased with the fundamentals of the stocks we favour. Many of these companies capitalised on the pulled-forward demand for their services by investing in new products and markets. Many of these strategic investments have resulted in accelerated top- and bottom-line growth this year.

While disruption from the pandemic and distortions in the global economy, including hiring problems and semi-conductor supply shortages, weighed on technology companies and their customers, we observed that the market began to focus more on underlying fundamentals than lapping year-over-year comparisons.

In software, we witnessed a greater dispersion of outcomes as enterprise-focused segments demonstrated durable growth in contrast to more mixed results from consumer-driven segments. We expect that as many of the cloud-based software-as-a-service companies grow, they will continue to leverage their fixed costs and expand gross margins so as to generate even higher levels of free cash flow.

In internet, we see opportunities in concentrating on winning e-commerce and social media companies across the globe. Many of these platform companies have been able to use their strong market positions, bolstered during the pandemic, to expand their offerings and create durable growth. 

Ed Verstappen, client portfolio manager
Robeco

Ed Verstappen

Notwithstanding concerns for higher interest rates which will compress valuation multiples, and expanding regulatory oversight which could yield higher operating costs, we continue to see tremendous opportunity for technology stocks.

From the rapid speed of the Covid vaccine development, to the nearly overnight shift in work and classrooms from physical environments to virtual, technology has clearly demonstrated its vital role to society and the market. Although the pandemic greatly accelerated growth for technology providers in 2020, and the rate of growth has decelerated in 2021, we are still fairly early in the cycle for many trends. 

Take e-commerce for instance, one of the early consumer technology trends; in the US, the segment accelerated from 15% YoY growth in 2019 to 32% in 2020, but still represents just 14% of total retail sales. Similarly, within the enterprise, cloud delivered software represents just over of a third of the market. Spurred by increased concern for the environment and accelerating improvements within the underlying technologies, electric vehicle sales may double this year, but represent just 5% of vehicles sales. The runway remains long for innovative companies to invent new solutions, reimagine industries, and expand their role in the economy.

Jack Janasiewicz, portfolio manager
Natixis Investment Managers Solutions

Jack Janasiewicz

The question should be whether to increase tech allocations today. Tech should remain a staple in any portfolio these days. While we will only know if we are currently in a technological revolution with hindsight, the amount of disruption and creativity coming from this sector is clearly breathtaking. With this backdrop in mind, tech remains in a structural uptrend that will ebb and flow around short-term secular shifts. 

In today’s environment, we find net income margins in this space pushing all-time highs. With raw material input costs and wages on the rise, tech may very well be one area of the market positioned to withstand these headwinds. Sales continue to grind higher as the global pandemic has given a lasting boost to the sector. And the need to remain competitive in this environment is shining a spotlight on capex improvements. These improvements range from increasing or improving one’s online presence to combating labour concerns like higher wages or lack of skilled talent to updating and streamlining production efficiencies.  All of these favour ‘New School’ capex spending — tech equipment, software and R&D — over ‘Old School’ upgrades around buildings, media and other equipment. 

Should one be adding to tech now? Long-term investors would certainly be wise to add on any relative underperformance. Short-term investors may find relative opportunities more appealing in the cyclical space given that this area has lagged the broader market. We prefer a barbell approach — owning both tech along with cyclicals in today’s environment.  

Olivier d’Assier, head of applied research, Asia Pacific
Qontigo

 
Olivier d'Assier

There is no turning back now that the world knows we can live online, and technology will increasingly enable more and more industries to move to an online business model. Add to that the growing importance of dealing with ESG and climate risk issues for investors – something millennials are also a lot more focused on than their parents. The solutions to these global concerns will have a large information technology component, adding another source of demand for investors.

The market correction during September was driven mostly by concerns over the strength of the post-pandemic economic recovery, the persistence of inflationary pressures from both the labour market (especially transportation) and global supply chain disruptions, and their combined impact on monetary policy. Despite these concerns, some of which may be dispelled during the current Q3 earnings season, the consensus remains on the side of continued economic recovery.

With these concerns in mind, investor wishing to jump back into the information technology sector, may want to discriminate between hardware manufacturers and software services provider.  The latter will be less sensitive to a worsening of global supply chain problems and may (depending on the service provided) benefit from renewed social distancing measures if those need to be taken during the coming winter. Hardware companies, on the other hand, will be more exposed to bottlenecks in the global supply chain or labour shortages in the transportation industry (e.g., trucking) and may see their profit margins come under pressure as a result.