PETALING JAYA: Technology stocks, which heavily underperformed last year, may be emerging on investors’ radar globally and locally, on bets of less aggressive interest-rate hikes from the US Federal Reserve (Fed).
Smart money is, however, urging caution as the global economy slows.
Early signs of the tech sector rebound can be seen from the Bursa Malaysia Technology Index, which is up by some 15% since mid-November, while the tech-heavy Nasdaq Index has inched up by 8% since the early part of this year.
The rally in China’s tech counters post relaxing of the country’s zero-Covid rules has added to the tailwinds. Charts of tech indices suggest strength to test higher.
With the expectation of a Fed pivot (slowdown in interest rate hikes) likely coming this year, MIDF Research head Imran Yassin Md Yusof believes the US tech sector and to a certain extent, Malaysia’s tech counters, will likely see a rebound this year.
“The local tech sector heavily underperformed last year and this is due to the interest rate hikes in the United States that affected Nasdaq, which is very sensitive to rate hikes” he told StarBiz, adding that sentiment has spilled over to the Malaysian tech sector.
Having a similar view, Tradeview Capital chief investment officer Nixon Wong believes that once the US interest rate hikes stall, growth counters like tech stocks will be in focus again.
“This is despite there still remaining some headwinds including both the magnitude of recession in the United States and the re-escalation of US-China trade war,” he noted.
Wong believes that not just Malaysia’s stock market is positively correlated to the global market, but also interest rate hikes.
“I believe the direction of Malaysia’s overnight policy rate is very much dependent on the monetary policy direction of the Fed,” he added.
The next two weeks could be pivotal for the trajectory of markets, especially the tech sector, ahead of earnings reports from mega-caps like Tesla and Microsoft following the announcement of layoffs as cost-cutting measures by major tech companies over the past few months.
While analysts expect Microsoft to experience a profit decline, Tesla is projected to post record-quarter numbers.
Hence, Wong’s advice to investors is to be selective and tactical as he foresees high market volatility to persist.
The initial public offering (IPO) market could again turn out to remain the exception this year. Investors who managed to subscribe to shares in the tech IPOs saw noticeable gains upon their listings last year.
For example, TT Vision Holdings Bhd
, which debuted on the ACE Market on Jan 18, is now trading at RM1.28 per share, up from its IPO offer price of 30 sen.
SFP Tech Holdings Bhd and Infomina Bhd, both of which went public last year, closed at RM2.35 and RM1.46 per share last Friday, against their IPO prices of 30 sen and 40 sen, respectively.
Commenting on this, Imran believes the early gains seen in tech IPOs may continue at least for this year, owing to the interest-rate pivot expectations.
“Moving forward, it will depend much on the economic situation, including the demand from the specific tech company products and innovations it brings to the table,” he said.
He believes traditional tech players, such as semiconductor manufacturers, may see a secular upward demand, given the prevalence of devices and the move towards 5G and electric vehicles.
Wong opined the share price trend may stall and reverse if earnings do not match investor expectations.
“Many of the tech IPOs debuted at stretched valuations, some even at a huge premium compared to industry peers in the same segment.
“In order to sustain the positive share price momentum, investors are looking out for confirmation from earnings delivery of these companies to justify the premium valuation given and to prove the execution ability of the business management,” Wong added.
One reasons behind the flurry into the mainly ACE Market tech IPOs, he believes, is their unique business model with limited comparable peers locally.
He added that some of them have reputable international clients and are operating in the higher level of the supply value chain, while some are the beneficiary of diversion from US-China trade war, all of which make them stand out among local competitors.
The high premium on listing is also partly because their share base is largely dominated by business management with limited public free float, he explained.
“Since most of the companies list at attractive valuations, demand from investors, either retailers or institutional, is boosted and hence the positive share price momentum,” Wong said.
When asked if there are chances for funds that left the tech sector over the past years to return this year, he opined that it is likely, but not in a big way, as the sector valuation has retraced to a reasonable level.
“Tech sector is now trading at a five-year average 12-month forward price-to-earnings multiple of 24 times to 25 times, compared to above 35 times at one point in 2020 and 2021,” he said.
Moving forward, Wong believes the positive sentiment of the sector provides opportunities for tech companies to tap into the capital market for funding.
“I believe there will be more tech companies related to future technology such as 5G, artificial intelligence, EV and Internet of Things to go public.
“Those are the areas with higher capital expenditure requirements for business expansion to ride on positive structural growth in the medium to long term,” he said.
At the Fed’s last meeting in December 2022, interest rates were bumped up by half a percentage point following four consecutive 75-basis-point hikes in its previous meetings.
From March to December 2022, the Fed raised interest rates by 425 basis points in seven separate meetings.
On Jan 31 and Feb 1, 2023, the Federal Open Market Committee (FOMC) will meet to decide on the next interest-rate hike, with several Fed officials have voiced for smaller hikes.
Fed governor Christopher Waller, on Jan 20, said he favours a 25-basis-point hike in the next FOMC meeting.
He believes that it made sense for a rapid hike, when the FOMC first began raising the interest rates from near-zero.
“But after front-loading monetary policy tightening, with many unprecedented 75-basis-point hikes in the federal funds rate target, by early December I believed the policy stance was slightly restrictive, and I supported a decision by the FOMC to hike by a still considerable 50 basis points,” he said in a speech at the council on foreign relations.
“After climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent,” he added.
