A variety of macro concerns have been weighing on sentiment towards the technology sector this year.

Risks related to an escalating trade war, with its potential impact on supply chains, weakness in emerging markets and related consumer-focused technology stocks, and rising regulatory scrutiny of mega-caps are by now quite well understood.

This week has been different in that we have seen a compression in multiples of stocks where valuations have been extended by a strong momentum trade in markets and where companies’ dependent on external financing have begun to face tighter liquidity conditions given rising yields.

Even before the correction, stocks in the sector (with the exception of some mega-caps) were trading at valuations in line with historical averages. Recent volatility presents an opportunity to add to positions from a long-term view.

FAANG stocks, which had hit highs in June, have been at the forefront of the recent sell off. Some defensive stocks, where the beta has been less than one, such as software and related names, tend to have recurring revenues and stable demand in a weakening growth environment. Local e-commerce players also tend to be more immune to trade-related disruption.

While some semiconductor stocks are cyclical in nature, high quality analogue firms in this space have also been delivering positive free cash flows in difficult periods, including during the global financial crisis, and have strong balance sheets and healthy dividends. They too benefit from structural drivers irrespective of short term volatility, with semiconductors the building blocks of many new technologies.

Hyun Ho Sohn

Hyun Ho Sohn

Portfolio Manager