As we end another dismal month in the markets, investors won’t mind seeing June in the rear view mirror. Notably, the tech sector had a lackluster month, with the tech-heavy NASDAQ index eyeing a 7.5% decline in June to add to its already steep losses in 2022.
But if you’re looking for a silver lining to all this negativity, perhaps investors could take solace in the fact that the market’s hollowing out in the tech sector has made some names much more attractive.
Which ones, though? Portfolio manager Jack Janasiewicz says if you’re buying, avoid companies with no profits and stick with the big tech names that are making profits on a quarterly basis, as these are the ones that are likely to outperform in tough economic times. .
“When you’re talking about technology, I think you have to break it down into different groups in terms of what we would consider concept capital and non-profit technology and obviously it’s going to be harder to bounce back here,” Janasiewicz said. , senior portfolio strategist at Natixis Investment Managers Solutions, speaking on BNN Bloomberg on Wednesday.
“But you still have a lot of these large-cap tech names that are still going to grow [and] that’s where you get a lot of those big margins,” he said. “And so when we look to the next two quarters – and margin pressure will certainly be one of the biggest issues there – the one place that still has a lot of resilience will still be one of those tech names. large cap.
“After having this multiple compression in this space, maybe this becomes the new defensive segment for the second half of the year that gives you a bit of an edge on this growth story,” Janasiewicz said.
The tech pullback has certainly been both broad-based and yet lopsided, as the market continues to further punish small-cap stocks. In Canada, the gap is evident in the contrast between the S&P/TSX Composite Index, which is down about 10% year-to-date and buoyed by strong performance in the energy sector, and the S&P/TSX Composite Growth Index, which is made up of smaller, younger companies whose positive earnings are sometimes still years away. Year-to-date, the Venture Composite is down more than 33%.
As for Canadian tech, the story is depressing, as names like Shopify, Nuvei and Lightspeed Commerce have all suffered huge losses. Shopify, for example, was once the darling of the Canadian investment scene and for some time had the largest market capitalization among publicly traded Canadian stocks, beating the perennial top dog Royal Bank. Today, after losing around 80% of its value in the past seven months, the race isn’t even tight: RY sits with a market capitalization of $175 billion while SHOP is down to around $57 billion. of dollars.
That’s not to say that some of the tech struggles of the past half year aren’t due, as the industry has reaped huge rewards over the course of 2020 and 2021 as investors have turned to tech as a user-friendly game for COVID. And market rotations this year into safer and more defensive spaces have also been reasonable given the economic uncertainties surrounding events such as the war in Ukraine, rising inflation and the continued fallout from COVID.
Nevertheless, even if economic growth slows – as was not only predicted but encouraged by central bank actions to control inflation – Janasiewicz thinks the major crisis in the first half of 2022 has already factored in much of this economic damage, which means there is likely an upside from where we are now. On that line, Janasiewicz says his company has started moving away from commodity exposure and into the tech space.
“I think when you look at what’s already reduced and we start thinking about the top down stuff and your traditional garden variety recessions, you get a 25% correction in the market. So we have already discounted this kind of banal recession. »
“What we’re hearing a lot about now is that earnings estimates need to be revised down. The thing here, though, I think is maybe the market itself has already discounted those expectations. earnings and so maybe that’s the little problem here,” he said. “Yeah, analysts still probably have to lower some of those estimates, but the market really isn’t those analysts and the market has already done some of that.”
As for the technology, Janasiewicz said: “It was beaten [but] I don’t think this centuries-old growth story is going to go away. Valuations at these levels are significantly cheaper than what we saw at the start of the year. »