Analysis-Some investors are betting the best performing growth stocks will thrive during the US recession


By David Randall

NEW YORK (Reuters) – Concerns about a possible recession in the United States are prompting some fund managers to return to the big technology and growth winners of the past decade in the hope that they can better weather a storm. economic.

Many stalwarts like Microsoft Corp, Apple and Alphabet Inc, Google’s parent company, have suffered declines equal to or greater than those of broader stock indexes this year, as giant rate hikes delivered by a Federal Reserve battling the inflation hit the technology and growth names that led the markets in previous years.

Since growing companies tend to be less affected by the performance of the broader economy, some investors believe the most profitable names in the category could outperform the rest of the market if the Fed’s hawkish policy leads the United States in recession.

“You’re starting to see cracks in the economic growth, which will help select very well-positioned companies in the tech space,” said Saira Malik, chief investment officer at Nuveen, which has increased its positions in companies like Amazon. .com. Inc and Inc.

“Concept businesses that don’t have profitability will continue to be challenged because you need real fundamentals to back them up,” she said.

The trade is still nascent. Global fund managers increased their allocations to technology by around seven basis points, as measured by the latest BofA Global Research survey, although they remain bearish on the sector as a whole.

Retail investors, meanwhile, have been buying “big, evergreen tech companies” such as Apple Inc during recent market declines, according to Vanda Research.

Overall, the Russell 1000 Growth Index is down 28.4% year-to-date, well behind the 13.9% drop in the Russell 1000 Value Index, which contains stocks in more economically sensitive sectors such as energy. The benchmark S&P 500 index is down 20.7%, marking its worst first half since 1970.

Some tech names have suffered even bigger losses: Cathie Wood’s ETF ARK Innovation, which owns a range of newer companies including Zoom Video Communications and Teladoc, is down 57.7% since the start of the year.

Meanwhile, recession fears have increased in recent weeks. A global investor poll conducted by Deutsche Bank in June found that 90% now expect a US recession by the end of 2023, up from 78% the previous month.


For Jack Janasiewicz, head of portfolio strategy at Natixis Investment Managers Solutions, these worries are a good reason to increase positions in companies such as Alphabet, the parent company of Google. Janasiewicz is also betting that the hammering in their stocks has driven valuations down to attractive levels.

The forward price-to-earnings ratio for the S&P 500 technology sector, for example, fell to 19.1, its lowest level since early 2020, according to Yardeni Research.

“We’re seeing some of the most attractive valuations for this space that we’ve seen in a long time,” Janasiewicz said.

Of course, signs of continued high inflation could further bolster expectations of aggressive Fed action, potentially pushing bond yields higher and dealing another blow to tech and growth stocks.

Higher yields dampen the appeal of companies in technology and other high-growth sectors, whose cash flows are often heavily weighted to the future and shrink when discounted at higher rates.

Earnings season, which kicks off in July, may present another risk. A big factor for tech companies is likely the strong dollar, which is reducing earnings from offshore earnings. Microsoft cited dollar strength when it cut its forecast on June 2.

“We believe a better approach for global investors is to stay diversified and rely on stock selection to extract value from the markets,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments.

Others, however, are betting a tech bounce may be coming.

Signs that commodity prices may have peaked could pave the way for the Fed to pull back from its aggressive rate hike path in September, said Lindsey Houghton, portfolio manager at the Multi Team. -Harbour Capital Asset Solutions.

Houghton’s company sold some of its energy stakes to spin the shares of big tech companies, which it said could rise 20% or more a year over the next few years due to their depressed valuations and shareholding. growing market.

“Over the past couple of months, those valuations have started to get to a point where they look pretty attractive to us,” he said.

(Reporting by David Randall; Editing by Ira Iosebashvili and Nick Zieminski)


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