As increased interest rates and an unclear macroeconomic outlook might provide more challenges, investors are looking beyond the U.S. technology sector's recovery this year in search of longer-term gains, according to fund managers and strategists.
Stronger-than-expected results and cost-cutting initiatives from large firms, as well as anticipation that the U.S. Federal Reserve's rate hike cycle is about to finish, have helped the tech-heavy Nasdaq Composite increase 21% this year, more than double the S&P 500's 9% gain.
According to Abigail Yoder, U.S. equities strategist at J.P. Morgan Private Bank, other industries are expected to provide stronger returns over the long run at more appealing prices.
Yoder said at the Reuters Global Markets Forum that “the tendency is that… the sector that leads in one cycle doesn't tend to lead in the following cycle.”
The Nasdaq's current performance is a big improvement over 2022, when it saw a 33% decline, the worst year since the 2008 financial crisis. However, the concerns associated with rising interest rates and a probable recession in the U.S. economy have not diminished.
According to Jonathan Mondillo, head of North American fixed income at abrdn, “we are staying away from the more interest rate-sensitive sectors such as tech.”
According to Jonathan Duensing, head of U.S. fixed income at Amundi, more conservative and selective positioning across fixed income portfolios is a better option if one expects an economic slowdown in the second half.
We've long believed that the IT industry as a whole requires great caution, according to Duensing.
A projected recession in the fourth quarter of 2023 is the basic scenario for Abrdn. Mondillo favors loans in more defensive industries than technology, such as healthcare and consumer staples.
Similar to this, Yoder believes that healthcare is a good defensive investment during a recession, with mid-cap firms likely to fare better than their bigger counterparts.
“Longer term, we prefer actually mid-caps, which tend to be higher quality in nature, and tend to exhibit a really good up/down capture over time,” she said.