Technology stocks have taken a hit this year, but some are better prepared than others for rising interest rates.
“After outperforming early in the pandemic, the tech sector has been hit hard by rising interest rates and slowing growth,” said Tiffany Li, director at Rothschild & Co Asset Management in New York.
While many investors believed tech companies would see accelerated growth coming out of the pandemic with interest rates at historic lows, Li said that, in hindsight, a lot of demand was pulled forward during pandemic lockdowns. Now cost comparisons, competition and a slowing economy are hurting tech stocks, with most names seeing drops between 20% and 80%.
However, despite the recent under-performance, there are still attractive investment opportunities in the sector. “We still believe technology is the key to driving innovation and improving the competitive edge in every industry,” Li said.
“Longer term, the technology sector will continue to disrupt various markets and generate attractive investment returns.”
Names she currently likes are Alphabet Inc., Microsoft Corporation and Meta Platforms, Inc. (formerly Facebook), which are all trading at attractive valuations.
In terms of portfolio adjustments, Li said interest rates aren’t the only factor. “We focused on stock-specific drivers, and we tried to find stocks that can outperform in a challenging macro backdrop and rising interest rate environment,” she said.
She focuses on secular winners with strong competitive positioning, high revenue and free cash flow.
Li said to avoid expensive and speculative companies with negative cash flow, as well as cheap stocks that often become value traps.
The annual reconstitution of the Russell US Indexes is also affecting value portfolios, as more growth stocks — such as Meta and Netflix, Inc. — are included in the Russell 1000 Value index.
“As relative value managers, the evolution of our benchmark is something that we need to monitor closely, especially from a risk management perspective,” Li said.
At the end of the day, she said interest rates and growth need to stabilize for technology stocks to come back in favour. “At a high level, rising interest rates are usually negative for long-duration technology and growth assets,” Li said.
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