Sunday, August 7, 2022

Some investors bet that top growth stocks will thrive in a US recession

NEW YORK — Worries about a potential U.S. recession are prompting some fund managers to turn back to the big tech and growth winners of the past decade in hopes they can better weather the economic storm.

Several giants such as Microsoft Corp, Apple and Google-parent Alphabet Inc. have faced losses equal to or greater than the broader stock index this year, as the jumbo rate hikes delivered by the inflation-fighting Federal Reserve dented the names of tech and development. who lead the markets. in past years.

Since growth companies are less affected by the performance of the broader economy, however, some investors believe that the most profitable names in the category could outperform the rest of the market if the Fed’s bullish policy pulls the US into recession. Is.

“You are starting to see some cracks in economic growth, which will help select companies that are very well positioned in the technology space,” said Saira Malik, chief investment officer at Nuveen. Inc. and Inc.

“Those conceptual companies that don’t have profitability will continue to be challenged because you need real fundamentals to back it up,” she said.

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The business is still a nascent. Global fund managers have increased their allocation to tech by nearly seven basis points, according to the latest survey by BofA Global Research, although they remain bearish across the sector.

Meanwhile, retail investors are buying “evergreen big tech companies” such as Apple Inc. on the recent market slump, according to Wanda Research.

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Overall, the Russell 1000 Growth Index is down 28.4% year-over-year, trailing a 13.9% decline for the Russell 1000 Value Index, which includes stocks in more economically sensitive sectors such as energy. The benchmark S&P 500 index is down 20.7%, its worst first half of the year since 1970.

Some names in tech have suffered even more: Cathy Wood’s ARK Innovation ETF, which houses an array of new companies including Zoom Video Communications and Teladoc, is down 57.7% year-over-year.

Meanwhile, concerns about a recession have grown in recent weeks. A global survey of investors by Deutsche Bank in June found that 90% now expect a US recession by the end of 2023, up from 78% a month earlier.

‘Attractive rating’

For Jack Janasiewicz, lead portfolio strategist at Natixis Investment Managers Solutions, those concerns are a good reason to increase positions at companies like Google-parent Alphabet. Janasiewicz is also betting that the rally in his shares has driven valuations down to attractive levels.

For example, the forward price to earnings ratio for the S&P 500 technology sector is below 19.1, which is the lowest level since the beginning of 2020, according to Yardeni Research.

“We’re seeing some of the most attractive valuations for this space we’ve seen in a long time,” Jansiewicz said.

Of course, signs of continued high inflation could further raise expectations for Fed hawkishness, potentially raising bond yields and dealing another blow to tech and growth stocks.

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High yields reduce the attractiveness of companies in technology and other high-growth sectors, whose cash flows are often heavily weighted in the future and diminish when discounted at high rates.

Earnings season, which begins in July, can present another risk. A key factor for tech companies is likely to be the strengthening of the dollar, which cuts profits from overseas earnings. Microsoft cut its forecast on June 2, citing a stronger dollar.

“We think a better approach for global investors is to stay diversified and rely on stock selection to extract value from the markets,” said Brian Jacobsen, senior investment strategist at AllSpring Global Investments.

However, others are betting that a tech boom could be ahead.

Lindsey Houghton, portfolio manager for Harbor Capital’s multi-asset solutions team, said signs that commodity prices may be peaking could pave the way for the Fed to back off its aggressive rate hiking path in September.

Houghton’s firm is selling some of its energy holdings to rotate shares of large technology companies that it believes will be 20% or more a year over the next several years due to their depressed valuations and market share growth. It may increase beyond that.

“Over the past two months, those valuations have started to reach a point where they seem quite attractive to us,” he said.

Nation World News Desk
Nation World News Desk
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