Amid the bearish gloom, however, some tech investors see an opportunity. Valuations of once-expensive tech stocks have fallen during this year’s selloff, they say, and slowing growth could force the US Federal Reserve to abandon its rate hike path early.
Cathie Wood, CEO and chief investment officer of Florida-based Ark Investment Management LLC, noted the large allocations to cash, consumer staples and commodities in the Bank of America survey, with allocations technology well below the benchmark. That leaves room for products like her Ark Innovation ETF to outperform, “especially as cyclicals are experiencing some indigestion,” she said Wednesday during a webinar hosted by Emerge Canada Inc., based in Toronto.
The US$7.9 billion Ark Innovation ETF rose to fame when it captured the early rebound from the pandemic as interest rates fell to zero, posting a 153% annual return in 2020. He has since forgone those gains as innovation stocks saw growing interest. pricing environment. The ETF is down 49% this year.
However, Wood said the investment environment could once again favor innovation stocks. She said there were deflationary signals in the bond market, with the yield curve inverting and 10-year US Treasuries struggling to stay above 3% even with aggressive rate hikes.
“It tells us that the bond market is not worried about inflation and that the Fed – we believe in the next three to six months – will change its tune and may even reverse its position by the end of this year. “, she said.
Ryan McCormack, senior equity ETF strategist at Invesco US, also said tech stocks could rebound this year. McCormack said valuations of companies in the Nasdaq 100 index had fallen to levels “much more in line with history.”
“Unsurprisingly, when you see market sell-off and negative sentiment, you’ll see investors heading into your traditionally defensive sectors, like utilities or consumer staples,” he said in an interview. . “We’ve seen some of those defensive valuations start to rise and we’ve seen those growth-oriented valuations come down.”
Wellington-Altus chief market strategist James Thorne, who spoke at the Emerge webinar with Wood, said he doesn’t think inflation is a lingering problem. Rather than the end of the “age of secular stagnation”, Thorne attributed the surge in inflation to the combination of Covid-related supply problems, monetary stimulus and the inflationary shock of the invasion of the Ukraine by Russia.
A slowing economy will force the Fed to change course, he said: “We’re saying they’re pivoting and cutting rates in 2023. If that’s the case, you want to buy innovation; you want to buy technology.
Many economists don’t see the pivot coming so quickly. The June Fed dot chart showed the median year-end interest rate projection was 3.4%, rising to 3.8% for the end of 2023.
In its latest Fixed Income Monitor, National Bank predicts the Fed will raise its key rate from 1.75% to 3% this quarter, where it will stay until a 25 basis point cut in the first quarter of 2024. Scotiabank sees the Fed rising to 3.25% this year and through 2023, while RBC expects the U.S. interest rate to rise to between 3.25% and 3.5% this year, with cuts to come in the second half of 2023.
As a result, many investors are happy to stick to defensive sectors and are reluctant to jump back into growth stocks too soon. National Bank’s Monthly Equity Monitor for June had an IT underweight of 5.5%.
But Wood said the case for innovative companies is strong.
“The last two years – Covid, then supply chains, then war – have created so many problems,” she said. “There are so many more problems to solve, and this is where innovation is gaining traction. The turmoil has reinforced our confidence that these platforms will scale.”
– With files by Daniel Calabretta