Tech stocks poised for a comeback, says equity manager
As tech giants' power is likely to be curbed by US authorities, Stonehage Fleming says it will ‘only affect some businesses to some extent’
Technology stocks, which have fallen sharply in recent weeks on heightened regulatory scrutiny and ongoing trade tensions, are poised for a recovery, according to Gerrit Smit, head of equity at international family office Stonehage Fleming.
Despite rallying 2.7% on Tuesday after US Federal Reserve chair Jerome Powell said the central bank could cut rates, the tech-heavy Nasdaq Composite remained 7.8% down from its close on May 3.
Tech stocks — including JSE-heavyweight Naspers and its Chinese associate, Tencent — have been on the back foot for weeks amid trade disputes between the US and other major economies.
Tencent has slipped 14.6% since May 3, while Naspers has declined about 9%, propped up by the weaker rand and plans to list its international internet assets in Europe. Naspers’s decline has dented the JSE, given its hefty weighting in local indices.
The tech sell-off intensified on Monday after US authorities signaled their intention to curb the size and power of sector giants.
“The anti-trust probes will affect only some businesses to some extent, and it may take very long before that happens,” said Smit. “In those cases, valuations already reflect some of those risks.”
Compared to the anti-trust case Microsoft encountered in 2009, circumstances “are very different — we do not have an overheated tech bubble as was the case then”.
Sharp corrections in the tech sector occur relatively frequently every year, said Smit. “We expect tech stocks to make a comeback.”
The tech bubble at the turn of the millennium was driven by “hope” rather than profitability. Today, many businesses in the sector generate strong cash flows and dividends, and are “ingrained in business and daily life”.
“Valuations are not as excessive as generally thought,” Smit said.
US-listed tech stocks were trading cheaper than the broader market on free cash flow multiples. On a price-to-earnings basis, premiums were not excessive considering the sector’s “good earnings growth potential”.