Top strategist says end of correction for tech shares is nigh


Investors punished ASX tech shares early in 2022 as a wave of macroeconomic crosscurrents fed into equity markets.

Prospects of a hike in US base rates, shifting yields on long-dated bonds, hot-running inflation and simmering tension in Europe were all catalysts for tech-baskets to glide into the red.

Tech hardest hit amid global-macro pressures

Admittedly, there’s been pain felt across the board, but tech shares were hit hardest in 2022. What’s noteworthy is that many large indexes were heavily weighted towards the sector.

The S&P/ASX All Technology Index (ASX: XTX) – the best representation of the ASX tech sector’s performance – is down more than 17% this year to date and is trading well below sectors like financials and mining.

It is now underperforming the benchmark S&P/ASX 200 Index (ASX: XJO) by a considerable amount as well.

That gap has been widening after a crossover point right after restarting trade on January 4 2022.

What’s markedly different this year is the rise of the once fallen commodities sector, where numerous markets are now thrusting past multi-year highs at pace.

But whilst there’s been a more risk-off attitude this year and market pundits have shifted towards more defensive positioning, now might be the time to consider the downbeat tech sector.

Rise and shine once more?

According to JP Morgan strategist Marko Kolanovic, the landscape is beginning to clear up and visibility has improved on the outlook for markets into the future.

“While the commodity supercycle will persist, the correction in bubble sectors is now likely finished, and geopolitical risk will likely start abating in a few weeks time (whilst a comprehensive resolution may take a few months),” he said in a recent note.

“There are great opportunities in high-beta, beaten-down segments that now include innovation, tech, biotech, emerging markets, as well as more broadly in small cap and more volatile stocks,” he added.

And it seems the market might be on Kolanovic’s side in this regard, with the tech sector punching more than 7% higher in the past week and climbing 4% today as well.

If the uptrend continues this would see a bounce off the 52-week lows touched in early March, and be a sure vote of confidence for the sector.

‘Bubble sectors’ might have bottomed

And as momentum builds, the JP Morgan strategist becomes more and more wide-eyed by the day, noting the selloff could be tumbling to an end.

It was the uncertainty around factors like inflation, interest rates and debate on the Russia-Ukrainian situation that predominantly hit the more volatile tech sector. This might have resolved, the expert reckons.

And to be clear – the strategist isn’t shifting his view on the outlook of commodities either. He’s just as bullish on the sector given current demand-supply mechanics.

“It is our assessment that these forecasts have now nearly fully materialised,” he said.

These segments might have already bottomed having flung 60–80% down, he says. This is a point JP Morgan thinks “is the end of the correction in some areas,” the strategist added.

“In fact, many of these market segments trade at all-time valuation lows (including previous recessions and periods of much higher interest rates)”.

But whilst there may be plenty of bargains around, a systematic approach is still best Kolanovic says, because “not all assets are cheap.”

In any sense, the tech sector still has to regain more than its 17% loss in order to breakeven at its former highs, but that doesn’t appear out of reach if prices keep surging.

Source: Read More

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