A recent fall in the performance of technology stocks after a strong year should be tempered with recognition of the sector’s earnings growth which has led a major world investment index for the past five years, according to investment manager Blackrock.
Market commentary released by the BlackRock Investment Institute about the recent dip in performance, where the sector was the worst-performing in MSCI World Index – down 2 per cent versus a flat broader market, noted the underperformance coincided with a rise in the U.S. 10-year Treasury Bond Yield to its highest level in more than a year.
“We believe the sector’s vulnerability to higher yields is overstated,” the BlackRock Investment Institute stated, adding “The tech sector has delivered the best earnings over the last five years on the MSCI World Index.”
It pointed out rising yields were theoretically bad for tech stocks that had high growth expectations as they reduced the present value of their long-dated cash flows. However, in the current situation, the bond yield increases were be driven by specific investor demand that was unlikely to be long term.
“The recent yield spike has been driven by an increase in the term premium– the excess yield investors demand over and above the expected policy path of cash rates for bearing interest rate risk,” the institute said
“The ‘term premium tantrum’ mostly reflects investors requiring higher compensation for the now greater risks to portfolios presented by government bonds and inflation.
“This makes equities even more appealing than bonds in a multi-asset context – and suggests any further sell-offs in tech may present opportunities.
“We believe tech companies beating earnings expectations once again will be rewarded if bond yields settle back into a range.”
According to the BlackRock Investment Institute it remains important to recognise the diversity of the tech sector and that sensitivity in share prices to bond yields was greater toward the high growth, low profit end of the sector.
“It’s important to recognize the IT sector covers software and services, tech hardware and equipment, and semiconductors and equipment – but not online search and ecommerce giants,” it said.
The institute noted a restart to global economies would have a short-term impact on companies benefitting from people working from home and other pandemic-related trends and benefit more cyclical tech industries, such as semiconductors.
“Looking ahead, we still see long-term trends including digitalization and a ‘green’ transition to a low-carbon economy as supportive of the sector, even as more cyclical sectors may deliver much stronger earnings growth in the near term amid the economic restart,” it concluded.
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