Tech stocks have become one of the clear winners this year, as various parts of the economy have accelerated the adoption of technology amid the Covid-19 crisis.
On a year-to-date basis, the MSCI All Country World Information Technology Index has returned nearly 40%.
However, investors have become concerned about whether the rally in tech names is sustainable moving forward.
“I think the trend has been going a little bit too far,” Stéphane Monier, chief investment officer for private banking at Lombard Odier, said at a recent webinar, noting that he expects some mean reversion in the short term.
He added that value names are also starting to make a comeback, especially after news of the vaccine development, which should lead to a broad recovery of the economy.
“We see the vaccine discovery as a game-changer, which clarifies the path to a full recovery of the economy. The vaccine breakthroughs eliminate our worst-case scenarios, which make cyclical stocks, including small-cap names, more compelling.
“As such, we now see limited downside risks for value equities,” he said.
While Monier is positive on value names, he advises clients to continue to be invested in the technology sector.
“The trend toward technology is still clear and we expect this to resume in 2021.”
Monier noted that in the US alone, 27% of the its stock index account for technology companies, and 40% when communication services are added.
The case is similar in China, where Alibaba and Tencent represent at least 20% of the index.
“This shows how IT is becoming very important globally,” he said, adding that “quality names in the sector continue to have strong fundamentals.”
Other investment managers have echoed Monier’s views. JP Morgan Asset Management, for example, warned of a sector rotation, but continues to expect the tech sector to deliver returns.
“This is because many of these tech companies are still expected to deliver long-term value to shareholders. While tech’s price momentum has been formidable in the past 6 months, it is one of the few sectors that is expected to deliver positive earnings growth in 2020 and 2021,” Tai Hui, Asia chief market strategist at JP Morgan AM, said.
UBS Wealth also shared the same view, particularly on Chinese technology companies.
“We suspect superior earnings growth of 20-25% over the next 12-18 months, driven by 5G, cloud and internet,” UBS Wealth’s Eva Lee, head of Hong Kong equities, said.
Given that Lombard Odier’s Monier is positive to both value and tech names, he suggests investors to have a balanced portfolio of cyclical and growth stocks to capture the broad recovery of the economy.
