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In Barron’s, Eric J. Savitz explains how, despite a booming 2020, the tech landscape is about to get trickier. He writes:
No question, 2020 has been a horrific year. But for tech investors, it was sheer bliss.
Morgan Stanley analyst Keith Weiss wrote this past week that software stocks had gained 81%, on average, in 2020, driven by low interest rates, tailwinds from the work-from-home shift, and the lack of alternatives for growth investors. As a bonus, companies with rising subscription revenues tightened their belts on expenses, driving up margins.
The Nasdaq Composite has rallied 46%, year to date, triple the return on the S&P 500. Chip stocks have jumped 54%, cloud software stocks have returned 71%, and the Renaissance Capital IPO index has gained a gaudy 112%. In tech, almost everything worked.
Hope you enjoyed the run—2021 will be a different story.
The view from my corner of Silicon Valley is that the tech landscape is about to get trickier. Paul Wick, longtime tech fund manager at Columbia Seligman, notes that interest rates have begun creeping higher—and growth stocks historically underperform when rates rise. He thinks the Covid-19 vaccines, in addition to reopening the economy, should drive demand for commodities and add fuel to rising rates. Wick’s mutual fund has returned about 45%, on average, over the past two years, but he warns that returns on growth stocks could moderate or reverse in 2021.
“It’s a complex story,” Wick says. “There are certainly areas of the global economy that have secular growth trends, and that won’t change.” He points to the continued adoption of cloud computing, the rollout of 5G, and the electrification of cars. But he also notes that “valuations are extremely rich,” especially for the kind of stocks that populate growth funds. Morgan Stanley’s Weiss adds that the great reopening could push some investors to leave tech for cheaper opportunities elsewhere.
So, what happens next? Here are my 2021 tech predictions:
The IPO market will be bigger, still. As I noted last week, 2020 was the biggest year for IPOs since 2014, and that’s not including special purpose acquisition companies, a suddenly popular alternative way to go public.
Read more here.
