Technology stocks have fallen amid fears of inflation and tighter monetary policies, but some are better prepared than others for the new environment.
“People are using technology in a far greater variety of ways today than ever before,” said Murdo MacLean, client investment manager at Walter Scott & Partners Ltd. in Edinburgh, Scotland.
“How much of that has had to do with interest rate levels to me is somewhat questionable. At the very least, it’s a very difficult thing to calculate.”
MacLean, who manages the Renaissance Global Growth Fund and the Renaissance International Equity Fund, said he’s long been overweight on technology stocks compared to the MSCI World benchmark. At the end of last year, his global portfolios were, on average, about 33% exposed to technology businesses, versus 24% for the benchmark, he said.
Economies evolve due to innovation, MacLean said, and while monetary policy is in the background, he doesn’t think it is the driving factor.
“The generally accepted view… is that if rates go up, the value of future cash flow has come down. And hence, valuations and then share prices will fall,” said MacLean. “I suggest that this is certainly not exclusively the case.”
MacLean said investors must first separate the companies that may or may not deliver on “sky high” expectations from more reliable tech companies. The latter “have a long track record of success, of consistency, of growth, and have a clear, well established business model that feels tangible today,” MacLean said.
He points to the ARK Innovation ETF, the darling of the early pandemic market rebound as tech stocks soared amid rate cuts, remote work and social isolation. The fund has experienced significant sell-offs in recent months and is down almost 50% over the last 12 months. The fund’s top holdings include Tesla, Zoom and Coinbase.
“If you take a closer look at that fund, eight out of the top 10 holdings do not generate any profit whatsoever,” MacLean said, adding that many have reached “exorbitant” valuation levels in the last 12 to 18 months.
“What we’re seeing here is, as money becomes less freely available — and that’s a natural consequence of interest rates perhaps rising — that the degree of comfort in taking excessive risk falls,” he said.
MacLean attributes the collapse of share prices this year to this dynamic, which started last year among some of the more speculative technology companies (or “spec-tech” as they are becoming known).
With regards to inflation, MacLean said he chooses to invest in businesses whose management teams have taken precautions to cope with higher prices. Regardless of whether inflationary pressures become long term, he said certain businesses are more capable of weathering it.
Conversely, companies with excessive debt or lacking “well mapped out supply chains” are vulnerable to interest rates rises.
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