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Investment strategy
May 16, 2021

Does technology really have an inflation problem?

May 16, 2021
David Bailin
Chief Investment Officer
Steven Wieting
Chief Investment Strategist and Chief Economist
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SUMMARY

Interest rates are likely to rise further when the full, new economic recovery gets underway across the world in the near future. However, the mere fact that rates will rise does not spell the end of the rise of technology in the economy or doom tech share performance.

  • A correction in the technology sector is underway. The ascent of value versus growth (mean reversion), the impact of higher rates on shares that must grow into their valuations, a glut of new equity including SPACs and retail investor dynamics suggest that further short-term weakness in areas like video gaming, telemedicine, and artificial intelligence is possible.
  • The NASDAQ rose 47% in 2020 partly on extrapolation of COVID’s powerful reallocation to technological solutions. The modest rise in interest rates has taken some steam out of the performance of growth shares.
  • Making a massive shift into a still highly valued, cooling tech sector is not our strategy. However, the large dislocation in unstoppable trends is beginning to create opportunities for investors.
  • With some of our unstoppable trends like healthcare technology and fintech down sharply from recent highs, we believe that preparing to leg into those areas will be a profitable strategy for long-term investors.
  • While investments in video conferencing or home electronics may slow for a period, we expect continued spending in cybersecurity, fintech, and hardware investment as far as the eye can see. Meanwhile, we are less concerned about big tech concentration as earnings largely justify such a large weight in passive indices.
CIO Strategy Bulletin (PDF 1.47 MB)

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