07/05/2022 | News release | Distributed by Public on 07/05/2022 08:55
Equity Insights offers research and perspectives from Putnam's equity team on market trends and opportunities.
This month's authors: Neil Desai and Di Yao, Portfolio Managers
The first half of 2022 was anything but pleasant for investors, especially those with exposure to the technology sector. Tech stocks across global markets experienced violent sell-offs, and tech indexes are now firmly in bear market territory. This comes with the added challenges of inflation at 40-year highs, an increasingly aggressive Federal Reserve tightening stance, and mounting worries about a potential recession. In managing our tech portfolios, we are presented with a classic but not unfamiliar challenge: looking beyond the extreme volatility to find attractive long-term investments.
At today's level, technology valuations are close to their long-term average, but in our view, they are not screamingly cheap yet. As of June 23, the MSCI World Information Technology Index traded at 19.6x, compared to a 10-year average of 19x and a 5-year average of 22.5x. Notably, though, earnings estimates for the most part have not been adjusted to reflect an economic slowdown, shallow or deep. While early, we are just now beginning to see some tech bellwethers incorporate some caution in their outlooks. However, many are still blaming their downgrades on transitory issues, such as foreign exchange and supply shortages, rather than broad-based demand weakness. We believe that will be the next leg as we readjust, and heightened volatility could continue for the next several months.
Recently, however, we have started to see some policy easing from the Chinese government in a bid to help offset economic headwinds. This, in our view, also reinforces the government's long-term support for technology companies. Growth is a vital component of its "common prosperity" goal, and the digital economy is only becoming more important to China's growth formula. China's internet companies will likely continue to be major contributors to - and potential beneficiaries of - these shifts, in our view. Broadly speaking, we believe some of these Chinese internet companies offer attractive secular growth potential at value prices. As such, they warrant our time and consideration for a portion of our investment allocations.
It is true that many high-quality, large-cap internet platform companies have seen their market valuations halved and are also arguably trading in value territory. That said, China is loosening monetary policy, contrary to most other global markets, and could potentially enter an economic expansion cycle in the second half of 2022. Trough valuations combined with positive earnings upgrades could pave the way for potential outperformance in an area of tech that many investors have exited completely. We see opportunity in Chinese e-commerce platforms Alibaba and JD.com, along with local services player Meituan.
Even in tough markets - often especially in tough markets - our deep research can help identify compelling opportunities.
One example is Dutch lithography machine maker ASML Holding. ASML manufactures some of the world's most advanced lithography tools using extreme ultraviolet light. Regardless of a near-term slowdown in demand, we believe ASML may benefit as businesses continue to expand manufacturing capacities as part of their strategic, long-term capital expenditure plans.
As almost every life experience becomes more digitally connected, we see businesses ranging from internet giants to vertical software vendors becoming more critical to enabling this transition. Regardless of current challenges, long-term tailwinds include demand from businesses for cloud computing, software as a service, and the digitization of their enterprises. We believe there remains a long runway for growth as tech companies penetrate these massive addressable markets.
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The views and opinions expressed are those of the authors, are subject to change with market conditions, and are not meant as investment advice.
Putnam Global Technology Fund holdings as of 3/31/22: ASML (3.15%); Alibaba (2.25%); JD.com (1.44%); Meituan was not held.
Our investment techniques, analyses, and judgments may not produce the outcome we intend. The investments we select for the fund may not perform as well as other securities that we do not select for the fund. We, or the fund's other service providers, may experience disruptions or operating errors that could have a negative effect on the fund. You can lose money by investing in the fund.
Although there are near-term challenges, we believe there remains a long runway for growth as technology companies penetrate massive addressable markets.