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Have tech companies lost their reign over the stock market?

Oct 7, 2021

Redacción Mapfre

The technology sector, represented in all its essence in the Nasdaq, has registered sharp losses on the North American stock market this week. Added to this is the scare caused by the outage of Facebook's online services, and by extension, WhatsApp and Instagram, which resulted in a $6 billion market cap loss in a single day. Are we witnessing a change in trend following the long, almost uninterrupted rally, or is it possible to take advantage of this correction to find new opportunities? Ismael García Puente, Investment Manager and Fund Selector at MAPFRE Gestión Patrimonial (MGP), considers that “it would be too much to say that this sector’s reign is over.” “It is true that we have seen straight-line increases these past few years and that these securities have even been considered to be a refuge when volatility has increased, but the losses experienced this week have more to do with the adaptation to a changing interest rate environment. And this is because higher rates drain value in companies with cash flows more distant in the future,” the expert added, during his commentary on Ponte en Acción, on Negocios TV.

That is why it is important to distinguish between those companies that already have profits at the moment, in the present, with positive cash flows, and therefore, will not be affected as much by this new interest rate environment. “Although they are listed at high valuations, these companies present opportunities because of the 'guidance' that CEOs provide," he said. However, there are other firms whose valuations cannot be accurately calculated using the typical ratios and that barely show any current profit: "There we could see certain losses to compensate for the excessive optimism about the profitability of this part of the sector.”

For this reason, MGP has not changed its strategy excessively. “We will continue to opt for funds in which the valuations make a lot of sense, and by doing so, we feel comfortable in the long term. We have changed the mix of funds that we include in certain portfolios to compensate for the possible effect that raising rates may have on these tech companies,” he explained.

Especially important, and in connection with this rate increase, the United States employment data will soon be released, which could accelerate it even more. Nevertheless, and although García Puente believes that the decisions of central banks should not be underestimated, “the data (on employment) has to be very surprising, whether it be positive or negative, to change the decision already made: to reduce purchasing programs in November or December.”

In this situation of uncertainty, many companies have once again become very generous to their shareholders. The MGP expert says that overall in Europe, the dividend yield is still higher than government-issued bonds. “Consider that in 2020, companies reduced dividend payments in proportion to their losses in profit, and since then, although accounts have improved, it has not been passed on to the shareholder remunerations, which seems to indicate that this trend will continue.” That being said, “you have to draw a distinction between the companies that have more cash now than they did a year ago, and how sustainable that dividend could be in the future," he concluded.

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