As a result of the 2022 market correction, technology stocks and in particular long duration assets were hard hit. A good number of well-known companies corrected by more than 60%. Yet and despite mounting economic concerns, the FANG+ index (top 10 IT companies) is now up by over 42% (YTD). Given the recent performance development, parts of the IT sector look now expensive, not only against the broader market, but also against other sub-sectors inside the technology industry. While the broader technology sector has little investment incentives as now, we continue to see areas of opportunities.
First quarter earnings were above analyst expectations, but lower than historic figures. As of now, the elevated valuations remain supported by more or less visible market conditions, but are subject to strong corrections should the market sentiment turn negatively. Key figures to look at are: IT trades at a PE of 22 12 months forward earnings, which represents a 22 % premium. Similarly, the sector is trading in the 90th percentile of the past 20 years.
Investment considerations:
As a general recommendation, we would suggest a partial profit taking on highly cyclical exposure, such as semiconductors. This sub-sector has outperformed other segments recently, and we little upside for these stocks in the very near future.
Investors with below benchmark exposure:
Add complementary well diversified exposure, this may occur through
- Structured solutions with low gear-puts
- Capital guaranteed exposure
Investors with above benchmark exposure:
- Switch to more defensive sector exposure such as software
- Add capital guaranteed exposure
Overall, we continue to recommend investors to seek exposure to the technology sector. In a particular we recommend building a long-term exposure to economic developments that can generate above average growth such as AI, Cybersecurity, Big Data (IIoT, 5G, Automation and robotics). According to research published by UBS AG, the broad AI hardware market is likely to achieve a 20% compound annual growth rate to reach USD 90bn in the next financial year. Artificial intelligence and by extension metaverse, smart automation, and cognitive computing are horizontal technologies that will drive investments across multiple industries and its return opportunities are expected to be superior to any market reference.