Market experts at BlackRock, Principal Global Investors, and LA Capital break down the 6 reasons why tech stocks still have room to run higher — and why fundamentals will matter more than blind risk-taking
- Market experts say growth stocks, including Big Tech, have further to run.
- Big tech has been cheapened by a rotation into economically geared value stocks.
- Company fundamentals are going to be even more important, rather than sector gains.
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Money managers, including BlackRock, the world’s biggest asset manager, remain bullish on Big Tech and other growth stocks even as the vaccine rollout herald a rotation into more economically linked stocks.
Value stocks have witnessed a substantial recovery as investors poured into cheaper companies in the financial, energy, and retail sectors that had been hard hit by the pandemic, hoping to capture exposure to the so-called reopening trade. The MSCI World Value Index, a basket of these stocks from around the global market, has gained 23.14% in the last six months, outperforming its growth peer by almost 10 percentage points.
The reversal out of growth and into value has left some investors questioning whether this heralds the end of growth’s massive outperformance over the last decade which fueled the huge gains in valuations for Big Tech.
But investing experts at BlackRock, Principal Global Investors, and Los Angeles Capital argue that it’s too early to count out the strategy. Instead, investors will start to concentrate more on fundamentals, as opposed to blindly taking on risk in high growth-promising companies. Some even say this is the opportunity to buy these household names at their lower, currently bruised prices.
Nigel Bolton, Co-chief investment officer of BlackRock’s Fundamental Equity Group:
With bond yields and value stocks already recovering, markets are preparing for a post-COVID growth spurt. Beaten-down cyclical stocks, which have been overlooked for a decade, should continue to benefit from the reopening trade and earnings recoveries, Bolton said.
“But many have already notched significant gains over the past six months, making valuations less attractive,” he added.
The broader economic recovery will also not disrupt the trend of technological innovation, which allowed some growth companies to outperform during the pandemic. And after their valuations took a small bruising from the rotation, they are now available at better prices, Bolton explained.
But investors won’t be as free with their capital with opportunities with allocations becoming less about big sector moves, and more about company specifics and an ability to deliver earnings, he added.
“Valuations for many of the pre-pandemic winners that benefitted further from trends accelerated by COVID — such as tech and renewable energy companies — have retreated from lofty 2020 levels, making them more attractive for long-term investors,” he told Insider.
Some of the companies that performed best during crisis have been the so-called ‘pandemic winners’ which have enabled working from home. Even post-pandemic, investment in IT and cloud computing should “remain elevated” as corporations adjust to a new normal which incorporates a part-time remote working model, he added.
“Companies that can help with digitalization appear well poised to take market share and deliver impressive earnings results. Popular clothing brands that can sell directly to consumers online should gain customers as that trend continues even as stores re-open,” Bolton concluded.
Seema Shah, chief strategist, Principal Global Investors
Tech stocks have “comprehensively passed” the testing challenge of rising bond yields, its threat to the “stay at home trade,” and are managing to maintain their momentum, Shah said.
Shah argues that this resilience is underpinned by four key factors:
- The stocks have become a “logical safe haven” for investors who are still concerned with the economic outlook, giving them an easy place to allocate funds if the reopening stutters, Shah noted.
- Bond yields can’t feasibly go much higher, they said, and as they tend to have an inverse relationship with large-cap growth stocks. This should cool concerns of a further hit to Big Tech.
- “We are entering a phase where strong balance sheets and cashflow will be even more important,” Shah said, noting that government support will start to roll back, threatening “weaker companies which have been propped up.” This will reinforce the need for a sharp focus on fundamentals, with companies emerging from COVID with a robust balance sheet and strong cash reserves very well placed for further growth. “We expect another positive earnings season for the large tech companies,” she added.
- Household reliance on the technologies that have helped society through the pandemic will remain an essential part of life, Shah said, bringing customers onto their business models. “Cloud computing, innovative software and remote working tools are trends which will be sustained through and beyond the pandemic recovery, even if they don’t enjoy the same impressive returns they did last year,” Shah said.
“Whilst value stocks have shown signs that they may be set for a return to favor, we don’t think that growth stocks — particularly the tech giants — are running out of steam yet,” she said.
Hal Reynolds, chief investment officer, Los Angeles Capital
With the discount rate on value stocks falling considerably due to optimism and reduced credit spreads, Los Angeles Capital, which manages around $26.7 billion in assets under management, is favoring growth stocks which have yet to lose their fundamental momentum.
“Should long-term interest rates and stock level discount rates stabilize, we expect both value stocks and a handful of the most successful growth stocks to outperform over the remainder of 2021,” Reynolds said.
Reynolds notes that the last several trading days in March have demonstrated investor enthusiasm for growth, but reinforces the emphasis on fundamentals.
“Unlike the second half of 2020 when investors embraced riskier stocks despite weak or non-existent earnings, tomorrow’s returns will be driven by changes in a company’s earnings outlook. As the world moves past the pandemic, look for investor focus to return to fundamentals,” he concluded.
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