HAN-GINS. Rising rates makes it scary to hold tech – but the profitable and resilient tech companies should withstand
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Anthony Ginsberg, Co-creator of The HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEK)
• Rising interest rates are causing a sell-off in tech stocks, with Nasdaq down 9% in January.
• Younger, less profitable tech firms are typically those that suffer from higher interest rates due to relying very heavily on their future projected earnings.
• While a raising rate environment may make it tempting to avoid tech stocks, we believe there are many profitable and resilient tech companies that can withstand the inflationary pressure with their pricing power and stable cash flow growth.
Anthony Ginsberg, manager of the HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEK) comments on the recent tech sell-off:
Markets have not got off to a good start this year. Over the course of January, the S&P 500 has lost over 7%. In particular, technology stocks have been hit the hardest. The S&P 500 Information Technology index has lost over 9%. Meanwhile, the tech-heavy Nasdaq Composite index has lost around 12%.
The reasons behind this are easy enough to grasp. Markets fear rising interest rates as central banks try to grapple with persistently higher inflation. This, in theory, poses a threat to technology stocks. Technology companies are often those that don’t generate much (or any) profit in the present, but offers the promise of fast growth and huge massive profits. But if inflation and interest rates are rising, those future cash flows become less appealing today.
The past decade has been characterized by sluggish economic growth, low inflation and rock-bottom interest rates. Partly because of this, tech stocks had a great decade. The pandemic and the subsequent recovery has changed this, with the outlook for inflation and interest rates potentially much higher. This causes trouble for the share price of technology stocks, reflected in the recent market sell-off.
But while it is true that rising inflation and rising interest rates can put a damper on certain tech stocks, we believe HAN-GINS Tech Megatrend Equal Weight UCITS ETF (ITEK) is well positioned to weather this storm.
Importantly, ITEK’s holdings represent mostly well-established large and mid-cap tech firms (across 8 subthemes). We have very few small cap holdings. This is important as younger, less profitable tech firms typically suffer more from higher interest rates due to relying very heavily on their future projected earnings.
In contrast, much of our ITEK holdings are successful cash cows with pricing power and market dominance, such as Apple, Nvidia, Amazon, Microsoft and Tesla. This can be seen in recent earnings results. For Apple, recent 4th quarter 2021 results showed the company making an all-time record revenue of $123.9 billion, 11% up from last year and higher than analysts’ average estimate of $118.7 billion. Meanwhile, Tesla’s Q4 figures revealed a record quarter. The company also reported $5.5 billion in net income last year compared with the previous record of $3.47 billion in 2020. This marked the companies’ third straight profitable year.
While a raising rate environment may make it tempting to avoid tech stocks, but we believe there are many profitable and resilient tech companies that can withstand the inflationary pressure with their pricing power and stable cash flow growth.
Due to ongoing supply chain constraints we’re positive for the outlook of such themes as: Robotics & Automation, Cybersecurity, Cloud and Future Cars. Ultimately technology is expanding fast globally, disrupting many industries, in our view. So we’re bullish on tech overall still. Our global equal weighted approach with 114+ holdings – is a prudent, diversified approach, with only 54% weighting to the US.
Source: ETFWorld.co.uk
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