How to invest in technology in a high interest rate world
- Understand the impact of interest rates on technology stocks
- Discover what has been behind the strong share price performance of tech companies
- Explain how the pandemic impacted tech businesses
- Understand the impact of interest rates on technology stocks
- Discover what has been behind the strong share price performance of tech companies
- Explain how the pandemic impacted tech businesses
While we are not alone in seeing the present wave of technological change as representing a significant investment opportunity, in a world of high interest rates, such long-duration assets can fall from favour with investors.
Indeed, last year’s share price woes show the impact higher inflation and interest rates can have on the valuations of technology companies.
Higher interest rates are a financial phenomenon, and this has prompted the view from some that tech companies owe much of their success over the past decade or so to low interest rates and that higher interest rates over the coming years will hamper them. Indeed, we think this is probably the consensus opinion here.
We believe this consensus is wrong and that the resultant negative sentiment currently prevailing on thech stocks only adds to the opportunity.
While we believe it is exceedingly difficult to predict the path of interest rates over the coming years — and we do not take a strong view on this — we very firmly believe that should higher rates be sustained, they will not affect the progress of good tech companies or our ability to achieve excellent returns investing in them.
Bottom lines
There are three reasons for this. First, tech stocks performed strongly in the 2010s, not because they were pumped up by low interest rates, but because companies delivered on the fundamentals.
During the decade, tech stocks as represented by the Nasdaq index returned 18 per cent a year. This is clearly an excellent rate of return and ahead of the still strong overall S&P 500 annualised return of 13.5 per cent, the MSCI World Index return of 10 per cent, and the FTSE All-Share return of 8 per cent.
How much of that annual 18 per cent was driven by tech companies’ fundamentals and how much by multiple expansion?
The answer may surprise tech naysayers. A full 15.5 per cent of the 18 per cent (an 86 per cent share) was due to fundamentals. Breaking that down further, 14.2 per cent of this came from earnings per share growth a year and an average annual dividend yield of 1.3 per cent. Only 2.5 per cent a year was due to expansion of the price-earnings multiple.
We very firmly believe that should higher rates be sustained, they will not affect the progress of good tech companies or our ability to achieve excellent returns investing in themHuge fundamental successes over the decade such as Apple (25 per cent average annual EPS growth) and Google (17 per cent average annual EPS growth) trip off the tongue, but there were many more in the ranks.
