Investors look past tech sector for long-term returns
Investors are looking beyond the US technology sector's bounceback this year for longer-term returns, as higher interest rates and an uncertain macroeconomic picture could present further headwinds, fund managers and strategists said.
The tech-heavy Nasdaq Composite has jumped 21 per cent this year, more than doubling the S&P 500's 9 per cent rise, boosted by stronger-than-expected earnings and cost-cutting measures from major companies, along with expectations that the US Federal Reserve's hiking cycle is nearing an end.
Longer term, other sectors are likely to offer better returns at more attractive valuations, said Abigail Yoder, US equity strategist at J.P. Morgan Private Bank.
"The tendency is that ... the sector that leads in one cycle doesn't tend to lead in the following cycle," Yoder told the Reuters Global Markets Forum.
The Nasdaq's current performance is a significant turnaround from 2022's 33 per cent drop, its worst year since the 2008 financial crisis, but the risks posed by higher interest rates and a potential US economic slowdown have not faded.
"We are staying away from the more interest rate-sensitive sectors such as tech," said Jonathan Mondillo, head of North American fixed income at abrdn.
Anticipating an economic slowdown in the second half, more cautious and selective positioning across fixed income portfolios is a better bet, said Jonathan Duensing, head of US fixed income at Amundi.
"We've always felt that the tech sector in general is one where you need to be very selective," Duensing said.
Abrdn's base case is a likely recession in the fourth quarter of 2023. Based on that, Mondillo prefers credit in more defensive sectors, including healthcare and consumer staples, over technology.
Similarly, Yoder sees healthcare as an attractive defensive option in the face of recession, with mid-cap stocks likely to outperform their larger counterparts.
"Longer term, we prefer actually mid-caps, which tend to be higher quality in nature, and tend to exhibit a really good up/down capture over time," she said.
Investors pumped US$25.1 billion into cash in the week to Wednesday, but the flow into cash funds has slowed recently, reflecting a greater degree of investor confidence, according to a report from Bofa Global Research on Friday.
A total of $151 billion went into money market funds over the last four weeks versus $404 billion in the four weeks after Silicon Valley Bank collapsed in March and the banking sector was engulfed in turmoil, the Bofa report showed.
Meanwhile, investors bought $5.6 billion of bonds and pulled $7.7 billion from equity funds in the week to May 17.
The report also showed US Treasuries clocking up 14 straight weeks of inflows, with investors buying $4.3 billion in the week to May 17.
They also showed a preference for investment grade bonds - which have seen inflows for seven weeks and a weekly inflow of $4.9 billion - over high yield bonds, from which investors pulled $2 billion last week.
The Bofa analysts said a 60/40 portfolio, which typically allocates 60 per cent of assets into stocks and 40 per cent into bonds, has recorded a 28 per cent annualized return in 2023, turning things around after a "disastrous" 2022.
A total of $1.1 billion went into tech stocks, marking a fifth week of inflows, as investors chose growth names over value.
Investors took $700 million out of financial funds, while real estate investment trusts saw their largest outflows since November 2022, totaling $600 million.
Looking forward to the next 12 months, Bofa said the "biggest pain trade" will be Federal Reserve interest rates at 6 per cent rather than 3 per cent.
Bofa said its bull and bear indicator - a measure of market sentiment in which a higher reading is more bullish - jumped from 3.4 to 3.5, its highest level since March 14.