Paul Hackett/Reuters
- The tech sector is not in a bubble, according to UBS Global Wealth Management.
- Mark Haefele said in a note on Monday: “The sell-off raises the question whether the time has come to sell tech stocks. But our view is that the move does not mark the start of a renewed decline in tech similar to March.”
- He said while EPS estimates for IT companies have risen 22% and are trading at highest levels since the dot com crash, Nasdaq valuations are still below levels seen in early 2000.
- Investors can use option strategies to position for the next bull market, he said.
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The technology sector is not in a bubble, despite trading near record highs after last week’s abrupt sell-off, according to the world’s largest wealth manager.
“The sell-off raises the question whether the time has come to sell tech stocks. But our view is that the move does not mark the start of a renewed decline in tech similar to March,” Mark Haefele, chief investment officer at UBS Global Wealth Management said in a note on Monday.
His comments after a tumultuous few days for tech stocks and the broader market.
On Thursday, US stocks fell the most in three months as investors sold high-flying tech stocks, causing the Nasdaq-100 to experience its sharpest decline since March, with a drop of 5.2%.
The S&P 500, and the Dow 30 and the Nasdaq have fallen for three straight days since the push lower began.
But despite this, Haefele listed a number of reasons why investors shouldn't be selling tech stocks.
Firstly, based on valuations, the tech sector is not in a bubble, Haefele said.
Technology companies are trading at 27 times their anticipated future earnings, 22% higher than the start of the year. However, valuations for the Nasdaq are still "well below levels" seen at the height of the dotcom bubble of the late 1990s when the forward price-to-earnings ratio for the index was above 70.
The dotcom bubble of the 1990s saw investors flock to tech stocks and internet related companies, vastly inflating stock prices and pushing the Nasdaq to a then-record high. But the bubble burst in early 2000, and the index lost more than 70% of its value between 2000 and late 2002.
Secondly, he said a downward correction does not necessarily imply the start of a more protracted decline, especially given central banks continue to roll out stimulus packages, which are keeping interest rates at rock bottom.
"As a result we are inclined to view the sell-off as a mid-cycle correction rather than the end of the rally. Over the past 5 years, we've witnessed a number of corrections in the global tech sector. Typically these have led to 10–12% peak-to- trough pull-backs, followed by a strong 20%+ rebound in the following six months," Haefele said.
How investors can position for the next stage of the bull market
- Invest excess cash straight away rather than "time the market". For investors who can implement options strategies, a put-writing strategy may hold value, UBS said.
- Diversify beyond mega caps. Investors should consider themes like technology disruption, which includes technologies such as 5G. Rebalancing towards themes accelerated by COVID-19 and companies likely to benefit from " a green recovery" are also advisable, UBS said.
- Seek alternate diversification methods. Given yields are low, investors will also need to seek other ways of diversifying their portfolios. "We like gold, which is backed by lower-for-longer rates and a weaker US dollar," the wealth manager said.