Tech stocks have been in a severe correction since early 2022. The downward movement could continue.
If we refer to the US market peaks reached in November 2021, $4 trillion market cap went up in smoke1, mainly due to the sharp decline in the technology sector. The hardest-hit stocks have seen falls of around 70% to 80%, consistent with the corrections seen between 2000 and 2003 during the bursting of the internet bubble. It should be noted that in this extreme move, a certain rationality has gripped the market. The companies hardest hit by the move lower are controversial companies or companies that are unable to generate cash flow2 significantly over an investment horizon of three to five years. The correction wave intensified and then swept across sacred tech monsters like PayPal, Facebook and even Amazon. An entry point may have emerged for some stocks, but discipline on valuations is essential as the correction has taken place for good reason.
GEOGRAPHICAL AND SECTORAL HETEROGENEITY
The tech sector is not a monolithic bloc. There are significant geographical differences, but also within the segments. If we analyze the pure technology index, around 10 stocks make up 50% of the weight of the MSCI World Information Technology1. In our opinion, they are not sufficiently representative of the fundamentals of the sector as a whole in this rather sensitive cycle. We expect more momentum in sub-segments such as semiconductors. Some device manufacturers remain very attractive. In terms of geographic differences, US Tech and Chinese Tech have an extreme valuation gap. In China, they are more attractive, but companies operate in a less favorable environment due to the geopolitical and political context (regulations, restrictions due to Covid-19). Despite attractive valuations, the lack of visibility calls for caution. As for European technology, with the exception of some payment giants like ASML and Adyen, it has been neglected by investors, especially Americans, because of the Ukraine conflict. Like the Chinese tech, it shows an asymmetry in terms of upside potential. It will be necessary to arm yourself with patience, the time when the currents and confidence return. China and Europe have attractive profiles in our view, but the real catalyst is yet to come.
DATA, A MAJOR TOPIC
Big data, a source of value creation, represents a strategic imperative for companies of all sectors, governments and individuals. The Ukraine conflict has not yet affected the dynamism of the industry, which needs to continue to modernize and invest in data processing and exploitation. Recent earnings releases have allayed potential investor fears. Technology remains at the center of concerns. It is able to provide answers to the major challenges of the coming months and years, such as inflation, geopolitical conflicts and global warming. First, technology is a major deflation factor. The data generated around the world every day improves algorithms and machine learning, helping to increase productivity. In addition, technological agreements, particularly related to data sharing, could defuse certain geopolitical tensions. Finally, from an ecological point of view, the processing and use of data aims to reduce costs and increase energy efficiency.
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