Posted inEquitiesTechnology

Tech stocks – time to take profits?

“Tech is one of the most cyclical sectors, and also one of the most expensive in our view, having returned 35% (MSCI ACWI Tech in USD) over the past 12 months,” said Luca Paolini, chief strategist at Pictet AM.

“Whilst the long-term case for tech remains on track to benefit from the digital revolution, tactically this is the time to take some profits. We have cut tech stocks to a single overweight,” he added.

Tech stocks are indeed the ultimate growth stocks, “and is the sector with the highest expected return,” says Paolini. That’s exactly why they have been so popular with investors and already delivered such great returns in recent years. But the question is of course whether much of the future growth has now been priced in.

Being growth stocks, technology shares have benefited disproportionally from the low interest rate environment, and are therefore vulnerable to monetary tightening. Investors got a foretaste of that last week, when technology stocks lost up to 4% in a matter of days amid hawkish speak by central bankers across the developed world.

Profit momentum

Pieter Schop, manager of the NN Information Technology Fund, acknowledges low inflation and interest rates have “led to windfall gains” for technology stocks. Though economic growth in Europe and emerging markets has been accelerating this year, and ECB-president Mario Draghi said last week that deflationary forces in the European economy have disappeared, Schop maintains “a climate of low growth and deflationary pressure will persist”, which would result in technology stocks continuing to deliver.

“Moreover, valuations are attractive compared to the growth potential (see graph below), there’s a lot of innovation, companies have strong balance sheets and profit momentum remains,” he said, adding that the sector will continue to be an engine of growth by facilitating productivity gains in the wider economy.

 

Part of the Bonhill Group.