BLUE CHIP INVESTMENT |
BLUE CHIP INVESTMENT | Technology Big tech turnaround: what’s behind the recovery? After dominating stock market returns amid the Covid pandemic, the household names of the US tech sector endured a miserable 2022. In recent months the tables have turned once again – we look at why. Big tech has enjoyed a resurgence this year. Seven large US companies (Apple, Microsoft, Alphabet, Amazon, Tesla, Netflix and Nvidia) have collectively returned 34% in the four months to 30 April 2023. Excluding these stocks, the remainder of the MSCI USA index has returned just 3%. The big tech stocks were “pandemic winners” in 2020 and 2021 amid strong demand for their products. They then experienced a difficult 2022 amid concerns over rising inflation and higher interest rates. That’s because higher rates mean their future profits and cash flows are worth less today. Inflation is still elevated though, and rates have been rising so far this year, so what’s behind the renewed rally for US big tech? The better performance can to some extent be explained by improving fundamentals, although it is a complex picture. Companies like Microsoft and Nvidia are enjoying very strong business trends. Those two companies are also thought likely to be clear winners of the generative AI revolution. Apple has also 30 www.bluechipdigital.co.za
INVESTMENT | Technology BLUE CHIP recently reported very resilient quarterly earnings, showing it is proving more robust than other more commoditised companies in the consumer electronics sector. What’s more, following the pressures experienced last year, some of the other members of this group – Amazon, Alphabet, Meta and Netflix – have now discovered the merits of cost-cutting. There is lot of potential to take out costs in those companies following the huge hiring spree of the previous three years. This could be either through headcount reductions or in some cases by reducing the compensation paid to some of the expensive talent they have as the labour market softens. So, we can say that fundamentals have been improving with regards to either the top line (ie sales/revenue) or bottom line (ie improving operating efficiency/cost-cutting to enhance profitability) for members of this big tech cohort. However, that’s not necessarily the whole story. Part of what’s going on in markets is a growth rotation. The banking sector stress we have seen this year has been a catalyst for a rotation away from value parts of the market and back into growth stocks. That is because the bank stress is contributing to tighter lending conditions, alongside interest rate rises. If the Federal Reserve were to pause its rate hikes, that would reduce a headwind for growth stocks like technology. This rotation has been a lot more pronounced in the US, which reinforces the view that it may well be to do with concerns over the economy and more cyclical parts of the market. Kondi Nkosi, Country Head, Schroders Important Information For professional investors and advisors only. The material is not suitable for retail clients. We define “Professional Investors” as those who have the appropriate expertise and knowledge eg asset managers, distributors and financial intermediaries. Any reference to sectors/countries/stocks/securities are for illustrative purposes only and not a recommendation to buy or sell any financial instrument/securities or adopt any investment strategy. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Past Performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. The views and opinions contained herein are those of the individuals to whom they are attributed and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Issued in May 2023 by Schroders Investment Management Ltd registration number: 01893220 (Incorporated in England and Wales) which is authorised and regulated in the UK by the Financial Conduct Authority and an authorised financial services. www.bluechipdigital.co.za 31
