The inflation problem for technology firms
Rising inflation could present problems for the technology space as companies will find it harder to justify their valuations, according to fund managers.
Tech names had seen their share prices rise over the past year despite many still being unprofitable businesses. While this was accepted by investors for a while, it would be more of an issue in a world of rising inflation.
At the March meeting of the Federal Reserve, chair Jerome Powell indicated the central bank expected inflation to rise in the coming months but that it was transitory.
T. Rowe Price said: “Although rising rates are often a sign of healthy economic growth and should benefit cyclical sectors such as financials, energy and industrials, they may spell trouble for higher-growth sectors like technology, that have benefitted in an environment of scarce growth and low rates. The high-flying technology sector’s extended valuations may become harder to justify amid rising rates”.
The team added the sector would be further challenged as a rate rise would prompt investors to pivot away from those high-growth stocks, such as technology, and into more cyclically-orientated sectors.
Stephen Hiscock, managing director at SG Hiscock, added: “In the next 12 months, people will build up their expectations for rising inflation and that is when ultra-growth stocks like Afterpay will find it hard to justify their valuations. We have reduced our exposure to ultra-expensive growth stocks across the board”.
He suggested areas such as resources and banks would be OK if inflation rose as would REITs, although it would depend on where the inflation came from.
Justin Tyler, portfolio manager at Daintree Capital, said: “Technology has been a driver of low inflation. Yet we have seen inflation in equity markets, which is clearly telling us that prices are going to pick up quickly. If inflation does move higher in the US, correlations between equity and bond markets will rise, which poses challenges for multi-sector portfolios, as both could sell off at the same time”.
AUTHOR
Laura Dew
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