The Stock Market’s decade long love affair with the large high profile technology companies began to fray in the second half of 2021 and took a serious hammering in 2022. Over the past year the MSCI World IT Index fell by 31%, a period when the world equity market overall was down by half that amount. The very high valuations enjoyed by many of these companies came under the spotlight as investors once again turned their focus to corporate cash flows, product pricing power and reliance on discretionary consumer spending as interest rates began to rise. Big Tech generally was seen to be vulnerable in all of these areas.
In addition, many of the online investment platforms were being increasingly viewed as mature offerings and that the growth rates of the past decade and more were not going to be repeated. Competition was also an issue, with newer platforms stealing a march on their older rivals.
So far in 2023, tech stocks are up by just over 10%, a little ahead of the wider equity market. So is it now time to buy? Well that probably depends on two factors (i) how are things likely to pan out for economies and markets in 2023? and (ii) did the fall in 2022 bring valuations back to more acceptable levels?
The jury is still out in relation to the economic outlook. The fact is that the effect of the interest rate rises on both consumers and corporates will not be fully seen until well into this year but there is little doubt that there will be pressure on consumer spend. This, combined with higher debt costs, adds to the risk of earnings disappointments/downgrades in 2023 for consumer focused tech companies.
As regards valuations, they still look a bit stretched compared with other sectors and, given the challenging outlook over the short to medium, it is hard to make a value argument for Big Tech.
So we continue to be cautious and are not recommending an increased exposure to mainstream tech companies quite yet.
As always, you should only consider the investment views contained in this update in the context of your own attitude to risk and how such choices might impact your Asset Allocation model. Should you wish to discuss your investment portfolio, please contact Harvest Financial Services on 01 2375500 or email justask@harvestfinancial.ie.
