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Putnam Investments recently offered technology-focused Equity Insights, in which members of the firm’s equity team delve into their research on emerging opportunities in the stock market.
Written by Putnam Portfolio Managers Neil Desai and Dee Yao, “Now What? What’s up with the technology?” He says the first half of 2022 is for investors, especially those exposed to the technology sector. Many tech stocks on global markets have experienced violent selling, and tech indexes are now in bear market territory.
Much of the volatility in tech stocks can be attributed to unusually stretched valuations and a delayed correction after the sector’s strong performance over the past decade, the brief said. The MSCI World Information Technology Index hit a record high in January, after the sector’s biggest dot-com bubble burst. At that time, the sector’s valuation was significantly higher than the long-term average.
These excessive valuation levels persisted for most of last year before showing signs of breaking last November, the brief said. In the year By the end of 2021, the index has produced a 30% annualized return and an annualized three-year return of 40%. As of June, the index is at 19.6x, compared to the 10-year average of 19x and the 5-year average of 22.5x.
“Early on, we’re starting to see some tech bellwethers exercise some caution in their outlook,” the brief says. “However, many still attribute their decline to temporary factors such as foreign exchange and supply shortages rather than broader weakness in demand. We believe it will be the next leg as we correct, and higher volatility is likely to continue for the next several months.
The brief highlights two industries that investors should watch, including Chinese internet companies and semiconductors. Over the past two years, many investors have opted out of Chinese tech stocks, based on unprecedented regulatory measures taken by the Chinese government since late 2020.
“Recently, however, we have begun to see some policy easing from the Chinese government to ease the economic headwinds,” the brief said. “Unlike most global markets, China is easing monetary policy and may enter an economic expansion cycle in the second half of 2022.”
As many high-quality, large Internet platform companies saw their market value cut in half, the brief said, “Trew estimates” combined with positive earnings improvements could pave the way for an outperformance in a technology sector that many investors have completely exited. .
Putnam says the outlook on semiconductors has been bullish for most of the past two years, but companies are taking a more cautious approach now that they are sending more chips to the end market than demand can justify.
Chip companies are likely to see their top line declines this year and in 2023 as demand in certain end markets declines, the brief said. However, there are some positive long-term semiconductor trends as the adoption of electric vehicles accelerates and the industry may be less impacted as global supply chains change and expand.
Looking ahead to future technological trends, the brief says that it expects 2022 to be the year of normalization. The past few years and the pandemic have changed the landscape in ways that will shape the industry for decades to come.
“As nearly every experience of life becomes more digitally connected, we, businesses from Internet giants to established software providers, will become more critical in enabling this transition,” Short says. “Regardless of current challenges, long-term tailwinds from businesses include demand for cloud computing, software as a service and digitalization of their organizations. We believe there is a long runway for growth as technology companies penetrate these massive markets.
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