Tech stocks were strong performers last year. The pandemic meant that providers of remote services like Zoom Video Communications or Peloton Interactive experienced massive sales growths, while a whole host of cybersecurity and cloud hosting companies did well alongside the usual big players like Microsoft, Apple and Amazon. However, as the economy bounces back from the disruption of COVID-19, tech stocks have slumped.
What this sell-off means is a big question for investors. Is it time to get out of Tech stocks? And if so, what sectors are a safer bet for 2021?
Several factors have contributed to Tech stocks decline in 2021. Bond yields, considered poor performers for a long time, have begun to improve. This has made them a more attractive destination for investment at the expense of tech stocks.
Another significant factor connected to bond yields is rising interest rates. Speculative, high-growth tech companies are reliant on future cash flow rises, so any sharp inclines in interest rates affect their future value, lowering their investment appeal.
Additionally, as COVID-19 vaccines roll out and the economy powers back, many investors are exiting Tech positions that performed well in 2020 and investing back into areas that should grow over the next year. Stocks that are linked to an economic comeback are looking more favourable.
If tech stocks are looking a little shaky, is it time to move into cyclical stocks? If the economy roars back, these stocks could be some of the biggest beneficiaries. JPMorgan’s Mislav Matejka certainly thinks so, and he suggested while some cyclical stocks values looked a bit “toppy” after a strong 2020, he wouldn’t recommend anyone to cash out just yet. Matejka went on to suggest that until bond yields came down, cyclical stocks should perform well.
Right now, Industrials, Energy and Communications stock all stand to benefit from the economic recovery and Joe Biden’s $1.9tn stimulus package. Banks and automotive stocks also look attractive. While the road to recovery is not clear yet, there is a good argument for investing in solid cyclicals with a good track record within specific sectors as the vaccine rollout continues.
Additionally, there are plenty of cyclical hospitality stocks that could be of interest to investors too. Travel and leisure companies like cruise lines have seen their valuations rise in recent weeks as the market speculates on the end of the pandemic. While these could turn out to be a good bet, there is too much uncertainty around travel and tourism to make this anything except a risky, speculative play. Caution is advised.
For some tech stocks, like Tesla and Invesco, this market correction was severe. Many US tech stocks had been aggressively priced and were reaching bubble territory. However, while bond-yields are high, it’s still not time to write off tech stocks. There are too many innovative and potentially market-disrupting technologies to believe this downturn will continue across the board.
Apple, Microsoft and DocuSign should all expect a reasonable 2021. Interestingly, stocks like Uber and Lyft — which both had disappointing sales growth in 2020 — should bounce back as global lockdowns recede.
Again, resilient stocks with good fundamentals are here for the long haul. While some pretenders will come and go, strong performers like Netflix, Apple, and Amazon will weather the storm.
Ultimately, while tech stocks have taken something of a dip lately, they aren’t going anywhere. Individual stocks will come and go, but the broader tech market will continue to show strength. It would be wise for investors to keep some tech stocks in the portfolio, with assets like Microsoft, Apple and Amazon good bets to ride volatility over the long term.
As tempting as it is, now is not the time to chase quick returns by gambling on news and fads. Investors should look to have resilient holdings across a few different sectors, including, but not limited to, tech.
Founder of Alpesh Patel Special Edition of ShareScope
This article is for educational purposes only. It is not a recommendation to buy or sell shares or other investments. Do your own research before buying or selling any investment or seek professional financial advice.