UBS: Information technology sector fundamentals remain healthy

The s & p 500 information technology index rose to a 52-week high at the end of December, but has so far pulled back nearly 13%, a bigger decline than the index period of about 8% (as of the beginning of the week). The sector is clearly in the adjustment range, and if market sentiment deteriorates, it will only take a few days to fall into a bear market.

However , UBS Wealth said , " the market is slightly raising the sector's performance forecast for this year , and corporate management has generally made positive comments , supporting our view that the fundamentals of the sector is still healthy . "

The following is the full text of the agency's latest views (first person):

The market expects revenue in the information technology sector to grow by 9.4% this year, but earnings will grow by only 6.6% due to rising interest costs and slightly higher-than-expected tax rates. However, based on share buybacks and index component / weight changes, earnings per share are expected to grow by 11.5 per cent.

The price-to-earnings ratio of the information technology sector has fallen by about 15 per cent from 28.7 times at the end of last year to about 24.3 times in recent days, which we believe is mainly due to a 47 basis point rise in US 10-year Treasury yields, which is particularly stressful for "long-term" technology stocks. If interest rates continue to rise, higher valuers are expected to continue to be sold off relative to technology stocks with lower valuations.

As interest rates continue to rise, the valuations of growth stocks may come under further pressure, but we believe that growth stocks with reasonable prices face less "headwind" and are paid by fundamental drivers such as earnings and cash flow. it is expected to offset the impact of renewed pressure on related stock valuations.In the sector, we prefer value stocks to growth stocks, mid-cap stocks to large-cap stocks, cyclical stocks to long-term trend stocks; high-quality but reasonable software stocks are also worthy of attention.

Last month's volatility in financial markets affected the performance of sustainable investment strategies, with global ESG (environmental, social and governance) leaders underperforming traditional stocks. However, we have seen a positive performance of emerging market strategies, with falling valuations providing access to longer-term growth.

The MSCI global ESG leader index outperformed the traditional parent index by 49 basis points in January. Investors are digesting the mixed fourth-quarter results, rising interest rates in key markets and the impact of the O'Micron outbreak on supply chains, labour supply and consumer demand. However, even if the global ESG leaders are weak, we believe that sustainable investment strategies will maintain good momentum, and diversification and stock selection are key:

While European and US ESG leaders performed poorly in January, Asia-Pacific and emerging market strategies performed better. Expectations that the Fed will raise interest rates nearly five times, superimposed by concerns about inflation, put pressure on the performance of growth stocks, with technology stocks particularly underperforming global energy, financial and pharmaceutical stocks. This has had a negative impact on MSCI ESG leader strategies, which prefer technology and alternative consumer stocks to energy and financial stocks. On the other hand, MSCI emerging market ESG leaders outperformed the benchmark index on the back of China's positive monetary policy. Investors can consider looking to emerging markets for tactical opportunities in sustainable investment.

The ESG leader strategy is to select first-class companies according to ESG risk management, which tends to favor large-cap stocks, growth stocks, and light-asset industries such as technology or finance. However, sustainable investment goes far beyond the strategy of ESG leaders. ESG reformers and ESG participation strategies are more likely to cover smaller companies, and there may be higher configurations for industries where ESG leader strategies are less involved, such as industry, materials, and energy. In an environment of rising interest rates and inflation expectations, we expect these strategies to show better momentum than others. Over the past five years, sustainable investment strategies have generally outperformed the parent index.

Sustainable investment strategies are also affected as markets digest data on economic growth and inflation, like other traditional strategies, but there are growth opportunities for certain sustainable investment themes, including green technology and the transition to net zero carbon emissions. The valuation multiple of sustainable investment strategies related to green technology has fallen, creating opportunities for investors to enter the market. In the context of market volatility, rising interest rates and rising inflation in some markets, investors can use different sustainable investment methods to diversify the allocation of stocks and fixed income assets.