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Are US tech companies expensive?

Investors should not be concerned about the rich valuations of US tech and healthcare companies, argues JP Morgan AM’s Tai Hui.
Tai Hui, JP Morgan Asset Management

With the volatility caused by the Covid-19 pandemic, asset and wealth managers have favoured the technology and healthcare sectors, which have proven to be resilient in the current market environment.

Tai Hui, Asia chief marketing strategist at JP Morgan Asset Management, has taken the same view and particularly likes the technology and healthcare sectors in the US.

“The quality of companies and their return on equities are leading the way,” he said during a media briefing, noting that overall earnings growth in the US market is expected to be 29% in 2021, which compares with 21% in Asia-Pacific (ex-Japan) and 23% in emerging markets.

However, he noted that investors might be concerned over the valuations of tech and healthcare names.

“Valuations are not cheap,” he said.

“Because we have such poor earnings this year and, with [an expected] pick up next year, that basically inflates all the price-to-earnings ratios,” he explained.

That said, Hui believes that investors should not pay too much attention to PE ratios as he expects a multi-year growth from tech and healthcare companies in the US.

“If earnings growth over the three-to-five years is going to be more robust in the US, then rich valuations right now is perhaps not the biggest concern.

“In a longer-term view, that would make tech companies look less expensive because there are companies that continue to generate strong earnings year after year,” he said.

Hui also likes the technology sector in Asia, particularly those that are focusing on 5G development, which he believes should pick up momentum once the pandemic starts to settle down in the region.

“That is going to benefit North Asian markets like Taiwan and South Korea, particularly for mobile phone manufacturers and related technologies,” he said.

High yield popularity

Separately, within the fixed income space, Hui favours high yield bonds as he expects interest rates globally to continue to remain low.

“All these zero interest rate policies around the world are pushing investors towards the riskier end of the fixed income markets, and frankly, that has been the case for the last 10 years, since the global financial crisis,” he said.

Fund selectors in Asia have also favoured high yield bonds and are expected to move cash to funds managing developed market investment grade and high yield corporate bonds, according to Last Word Media research. On the flipside, low yielding developed market government bonds were the least attractive of all asset classes.

Like JP Morgan AM, UBS Asset Management also favours high yield bonds, particularly those in Asia.

“The Asian high yield market has little exposure either to commodities or the consumer cyclical sector, so it is less vulnerable than US high yield to this year’s slump in economic activity or to future negative surprises,” Hayden Briscoe, head of fixed income in Asia-Pacific at UBS AM said recently.

JP Morgan AM’s Hui, however, noted that within the high yield space, he is staying away from the energy sector.

“Oil prices are unlikely to rebound strongly from the current level,” he said, adding that he expects the energy sector to struggle in the current market environment.


Part of the Mark Allen Group.