Investments | 21 July 2022
with the tech juggernaut slowing down, where next for investors?
The tech sector experienced exponential growth during the pandemic but is now facing a downturn prompting investors to look elsewhere.
Over the past couple of years, the tech sector has been synonymous with growth. Even when the pandemic took its toll on the global economy, technology firms thrived and profits soared. The shift to a more digital world created a surge in demand among investors, especially to FAMANG stocks – Facebook (Meta), Apple, Microsoft, Amazon, Netflix, and Google (Alphabet) – which gained over 50% in 2020 alone, according to CNBC.
As Howard Sparks, Senior US Equity Specialist at Coutts, notes, “looking at the annual returns for the tech sector over the last three years in the US – from the S&P 500 Information Technology Sector Index in US dollar terms– we see rises of 48% in 2019, 42% in 2020, and 33% in 2021. For investors, they're just astonishing returns.”
But the party may now be over, with even Jeff Bezos warning that “most people dramatically underestimate the remarkableness of this bull run. Such things are unstoppable… until they aren’t”.
Meta (formerly Facebook) took a $230bn hit to its market value in February 2022, Apple is no longer the most valuable company in the world, and the entire US technology sector is down 27% in US dollar terms year to mid-June according to Bloomberg, causing investors to wonder where to turn for returns.
Tech stocks epitomise ‘growth’ stocks, with high margins and the potential for substantial capital gains, but greater risk and volatility should the company’s growth path fall below expectations. These stocks generally do not pay dividends as the companies typically reinvest any earnings to further accelerate growth, and investors are willing to pay a high price based on the anticipation that the company’s value will rise.
But if this isn’t realised, we can see dramatic declines.
This is precisely what happened to tech over the past year. During the pandemic, tech stocks were trading at a very high price-to-earnings ratio, with valuations incredibly stretched. But as revenues started to stutter, growth expectations rescinded, and investors increasingly looked for the exit.
This tech downturn is based on a culmination of factors, from supply chain woes to record high inflation and interest rate rises, to the war in Ukraine. And this harsh financial climate has seen investors looking elsewhere for returns, turning to their attention to ‘value’ stocks.
Value stocks can deliver steady growth and dividends despite economic volatility as they typically comprise companies selling universally demanded goods and services. From consumer staples such as food and other commodities, to banking, healthcare, and energy, they involve the stuff we always need. And the relevant businesses have once again caught the eye of investors.
“Clearly, tech investors have had a brilliant three years, but now we are seeing market leadership switch to other areas of the market. And that's where there’s a lot of opportunities for individual value stock investment,” Howard explains.
According to Coutts, so far this year value stocks have dominated best in class investment lists, while tech companies have taken a back seat. These stocks typically trade at a discount to their intrinsic value with a low price-to-earnings ratio due to their moderate, though steady, growth outlooks.
For those looking to be hands on in taking advantage of market movements and valuations, the Coutts advisory portfolio service can support clients in developing their individual investment approach.
Coutts' experienced investment advisors, and a specialist in-house team of researchers and analysts, compile an extensive list of 'best in class' securities and funds for investors to consider. They also look for tactical opportunities based on each client’s risk appetite, return expectations and time horizons.
“Our process is very much driven by data, signals that we get from the market and industry specific research,” says Howard. “Markets are constantly changing, constantly fluctuating, so you have to be reactive. If an idea doesn't work, or is not working, then we'll cut our losses and move on to a new idea. We find that's a very effective way of managing the risk. Our move from growth stocks to value stocks reflects this.”
To find out more about our advisory portfolio service, please contact your private banker.
The value of investments could fall as well as rise and you may not get back what you put in. Past performance is not an indicator of future performance.