Technology has corrected sharply since the beginning of the year and the sell-off may not be over. Jacques-Aurélien Marcireau, Co-Head of Equities, and Xiadong Bao, International Equity Fund Manager, take a closer look at this brutal plunge. The portfolio managers also discuss whether a good entry point is now within reach and consider the prospects for the sector.
Since its peaks of November 2021, the US stock market has erased 4,000 billion dollars in shareholder value1, largely due to the sharp falls recorded within the technology sector. The most heavily impacted stocks saw their market price tumble by 70 to 80%, on a similar scale to the 2000-2003 crisis, when the dot-com bubble burst.
It is worth noting that despite these extreme moves, the market has remained rather rational. Companies most impacted by the sell-off are either exposed to controversies or unable to generate a large enough cash flow over a three-to-five-year investment horizon.
The correction wave grew before crashing down onto the tech giants, namely PayPal, Facebook and Amazon. Possible entry points may be appearing for several stocks; however, we recommend a disciplined approach to valuations as the sell-off occurred for genuine reasons.
REGIONAL AND SECTOR DISCREPANCIES
The tech sector is not a monolithic block but is full of contrasts, both across regions and business segments. A closer look at the tech index shows that only around 10 stocks weigh 50% of the MSCI World Information Technology1 index. We believe that in today’s rather sensitive cycle, these stocks fail to represent the overall sector. We are also expecting to see stronger momentum in a number of sub-segments, such as semi-conductors. Several equipment suppliers remain very attractive.
In terms of regional disparities, valuations within the US and the Chinese tech markets are poles apart. While valuations are more attractive in China, these companies are operating in an environment that is less favourable due to the country’s geopolitical and political context (regulation, Covid restrictions). Despite compelling valuations, weaker visibility calls for greater caution as far as this market is concerned.
In Europe, except for a couple of tech giants, such as ASML or Adyen in the payments industry, the tech sector has been largely out of favour, particularly with American investors, due to the conflict in Ukraine. As with China, the European tech market offers an asymmetrical upside potential. Nevertheless, inflows and investor confidence will need time to recover fully, and patience will be required. Our view is that Europe and China display attractive characteristics, but the true catalyst is yet to come.
THE KEY WORD: DATA
A driver for creating added value, Big Data has become a strategic imperative for companies in all sectors, but also for governments and individuals. For the time being, the Ukrainian conflict has not quelled the enthusiasm of industrial players that need to continue to upgrade and invest in the processing and use of data. Recent earnings publications have disproved any misgivings that investors may have had.
Technology will continue to play a key role because it can provide solutions to the major challenges we will face in the months and years to come – including inflation, geopolitical conflicts, and climate change. First, technology is a major deflationary factor. The data generated every day throughout the world improves algorithms and machine learning, leading to productivity gains. Furthermore, technology agreements – notably in the field of data sharing – could help ease several geopolitical conflicts. Finally, on the environmental front, the processing and use of data have the power to reduce costs and improve energy efficiency.
1 Source: MSCI.com. Data as of 05/05/2022.
LEGAL DISCLAIMER
May 2022. This document is issued by Edmond de Rothschild Asset Management (France). This document is non-binding and its content is exclusively for information purpose. Any reproduction, disclosure or dissemination of this material in whole or in part without prior consent from the Edmond de Rothschild Group is strictly prohibited.
The information provided in this document should not be considered as an offer, an inducement, or solicitation to deal, by anyone in any jurisdiction where it would be unlawful or where the person providing it is not qualified to do so. It is not intended to constitute, and should not be construed as investment, legal, or tax advice, nor as a recommendation to buy, sell or continue to hold any investment. EdRAM shall incur no liability for any investment decisions based on this document.
The information about the companies cannot be assimilated to an opinion of Edmond de Rothschild Asset Management (France) on the expected evolution of the securities and on the foreseeable evolution of the price of the financial instruments they issue. This information cannot be interpreted as a recommendation to buy or sell such securities. The composition of the portfolio may change in the future.
This document has not been reviewed or approved by any regulator in any jurisdiction. The figures, comments, forward looking statements and elements provided in this document reflect the opinion of EdRAM on market trends based on economic data and information available as of today. They may no longer be relevant when investors read this document. In addition, EdRAM shall assume no liability for the quality or accuracy of information / economic data provided by third parties.
Past performance and past volatility are not reliable indicators for future performance and future volatility. Performance may vary over time and be independently affected by, inter alia, changes in exchange rates.
« Edmond de Rothschild Asset Management » or « EdRAM » refers to the Asset Management division of the Edmond de Rothschild Group. In addition, it is the commercial name of the asset management entities of the Edmond de Rothschild Group.
EDMOND DE ROTHSCHILD ASSET MANAGEMENT (FRANCE)
7, rue du Faubourg Saint-Honoré 75401 Paris Cedex 08
Société anonyme governed by an executive board and a supervisory board with capital of 11.033.769 euros
MF Registration number GP 04000015
332.652.536 R.C.S. Paris