Volatility forcing tech managers to question valuations

Rising interest rates have led to a sell-off in high-flying tech stocks, forcing growth-focused managers to question some of their holdings.

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Murdo MacLean, client investment manager at Walter Scott & Partners Ltd. in Edinburgh, Scotland, said he’s still willing to pay a “reasonably full valuation” for stocks with a strong management team and profitable business model, but managers are becoming more selective.

“If you invest in areas that are a little more speculative, as we’ve seen of late, where there aren’t those boxes ticked, it’s all really about hope rather than actual tangible evidence,” MacLean said. “I think that the valuations that you’re willing to pay for those types of businesses have to have a big question mark when we see the return of volatility, and that could be driven by interest rates, inflation, et cetera.”

Equity markets witnessed a volatile start to the year, with the S&P 500 and MSCI Asia Pacific indexes down -5.7% and -4.34%, respectively, in January. While value stocks had their moment early in 2021, concerns regarding slower economic growth and renewed lockdowns saw the markets favour growth stocks again, sending tech-heavy indices ever higher.

However, with rate increases on the way, many investors are tilting toward value again.

Further, MacLean questioned the dominance of U.S. markets. He predicted a possible shift in asset allocation towards Asia Pacific, which has been less impacted by the sell-off.

Other risks to look out for in 2022 include geopolitical risks, as well as the ongoing Covid-19 pandemic, about which MacLean said “we’re far from out of the woods.”

“At the end of the day though, as I’ve said before, we simply want to buy the best businesses. Where they happen to be located is secondary and it tends to be that the longest lasting driver of share prices is the wealth that these businesses are creating,” he said. “Whether they’re in AsiaPac or in the United States or wherever they are, if they’re not growing, they’re unlikely to be a good long term investment.”

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Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.