Economy

Is the stretch out of tech stocks? ‘It makes sense that investors sprint to other stocks’

As an investor, is it better to have shares of companies that profit if the lockdowns are lifted sometime in the (near) future?

Is tech doing so badly now?

Despite corona, share prices are a lot higher than a year ago: the Amsterdam AEX index on balance gained almost 14 percent and the broad American S&P 500 index about 20 percent. This is mainly because tech companies rose so fast.

Many companies from other sectors did much worse. Just think of Air France-KLM (-35 percent) or investor in Unibail-Rodamco-Westfield stores (-50 percent).

In recent weeks, the tables had turned. Many tech companies did less well than the stock market as a whole. The Dutch ASMI even fell by about 11 percent since last Monday.

What is going on?

There are two issues: the lockdowns to get corona under it and the interest. First the lockdowns. We could also buy goods such as laptops and telephones during the lockdowns, but often online. Among others, chip machine manufacturer ASML and payment processor Adyen benefited from this.

However, we were unable to purchase many services, or were more difficult to purchase. After all, we did much less shopping in a brick shop, going to a cafe or flying at all.

Now that lockdowns are being watered down, we can spend money on this again, explains RTL Z stock market commentator Durk Veenstra. That stimulates the imagination of investors.

After all, if the turnover heavily depressed by corona can recover to the old level, then that would mean a huge increase. For example, the stock price of Basic-Fit, which has gyms, is now even higher than for corona.

Interest

The current low interest rates also play a role in the high stock market prices of tech companies. The value of a share is the future profits calculated back to now.

At an interest rate of 0 percent, the value of a profit of 100 euros that you make over ten years is now also 100 euros. However, if the interest rises to 1 percent, the current value will fall to 90.50 euros. That makes a lot of difference.

Interest rates have fallen sharply in recent years because central banks wanted to stimulate the economy in this way. That was good for stock prices and especially those of fast-growing tech companies.

Inflation

Recently, however, interest rates have risen somewhat. The fear is that inflation will rise, for example due to the large stimulus packages from governments to counter the effects of the corona crisis.

Central banks may then raise interest rates further to fight inflation, investors fear. Precisely because tech stocks are believed to continue to grow rapidly, more so than other companies, higher interest rates will hit them much harder. After all, you will recalculate all those profits at a higher interest rate.

Is the decline in tech continuing?

“In the past year, there were several minor corrections in the stock market, with investors thinking that the good times for tech stocks were over. However, the prices of tech stocks kept falling only temporarily,” said Hendrik Jan Tuch, head of fixed income at Aegon Asset Management.

“Other investors are using the fall in prices of tech companies to buy. But that will end once”, he thinks.

“We are getting more and more news about lockdowns being eased, so it makes sense for investors to sprint for stocks that have suffered so much,” said Tuch. Investors will then have to release money for this, for example by selling tech stocks.

Short versus long term

Eric de Graaf, tech analyst at ING, makes a difference between the short and the longer term. In the short term, he sees some profit-taking: “The valuation of tech in general is quite strong.” He also sees a rotation within the tech sector, towards companies that have lagged behind, such as Intel and Oracle. In the longer term, however, you cannot avoid tech stocks, thinks De Graaf.

“It is clear that tech will play a very important role at the fair in the next ten years”, Albert Jellema, founder of ProBeleggen, agrees. “For the last ten years, profit growth has only come from the tech sector and I am afraid it will be the same for the next ten years.”

There is therefore no question of a tipping point at which investors are en masse to say goodbye to tech and switch to underdeveloped companies from the ‘old economy’, Jellema thinks.

“That does not mean that ASML cannot go down 20 or 25 percent, but you must not forget that the exchange rate was 270 euros a year ago (compared to approximately 470 euros now) and only 160 euros two years ago,” he adds. .

Looking for higher returns

As far as interest is concerned, it is difficult to indicate when these tech companies will hurt, Tuch thinks. In any case, the first phase of an interest rate hike is good news, because it means the economy is recovering, which is good for profits, he says. An interest rate hike also initially means that investors are leaving safe government bonds in search of a higher return.

Interest rates may have risen, but at the current level, the higher interest rates don’t make much difference to stocks, he says. “As long as further interest rate increases are gradual.”

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