Greg Taylor, chief investment officer at Purpose Investments, discusses central banks, investor appetite and the outlook for the tech sector.
As mobile app companies continue to launch highly anticipated initial public offerings (IPOs) with gargantuan valuations — most notably Uber’s (NYSE:UBER) IPO fetching US$8.1 billion and Lyft’s (NASDAQ:LYFT) raising US$2.34 billion — the mobile app industry and overarching tech sector are facing considerable growth.
Since the S&P 500’s (INDEXSP:.INX) December 2018 lows, the market has shown double-digit returns. Central banks are putting a pause on interest rates, and there is some discussion that they may even cut rates if the trade war between the US and China intensifies.
On that note, the Investing News Network (INN) spoke with Greg Taylor, chief investment officer at Purpose Investments, about his recent commentary on the tech sector. He has said that stock market valuations are not far from their historical averages as central banks remains dovish moving into the second half of the year.
In the interview below, Taylor discusses investor sentiment in the tech industry, takeaways from the first quarter earnings season and his outlook for the sector. The interview has been edited for clarity and brevity. Continue reading below for more on what Taylor had to say.
INN: I noticed that you talked about the speed of the “bounce back” since December in your recent commentary. What did you mean by this?
GT: I think the bounce back to start the year is a combination of the central banks more than anything else. We had a market that sold off into November and December last year that was really built on a combination of trade fears, but also that the central banks were making a mistake by hiking rates at the wrong time. I think that was causing a lot of nervousness, and people decided to take money off the table and sell stocks and then, at the same time of the year, with it being tax-loss selling, it kind of fed on itself and caused the really big sell off in December. Coming into January … the change of calendar was a big change of sentiment.
And also … the Federal Reserve changed direction. They are more likely to be on pause, and potentially cut (rates). I think the narrative is that the Fed is actually going to have everyone’s back and not going to be ready to be negative on the market, (which) I think is a massive change. So that caused people to think, “Okay, don’t fight, the Fed is back, the Fed’s going to be supportive of stocks, it’s good to buy risky assets.” That caused the market to really get going.
I think now people are (seeing) that the market’s up double digits to start the year. What we’re seeing in May is more of just a pause reset as people try to get clarity on the second half of the year and more to judge the speed of the recovery.
INN: On May 13, the 10 year treasury yield inverted. Do you have any thoughts on what this could be about, what this might mean?
GT: I think really what that’s saying is that the bond market is saying there’s not a lot of growth out there, so you’re not paying a lot of premium for time. So I don’t think it’s that big of a risk at this time. Certainly the two year and the 10 year is a much bigger deal.
INN: Going back to the Fed, do you find that this halt on quantitative tightening will be beneficial long term or do you see this in concert with Trump’s campaign ambitions?
GT: Well it’s really interesting, because it certainly does seem to be very political that Trump does want to have rates lower and keep the economy going. Given that (the election is) a year plus away, I think that does give it a bit of a backstop that we feel that the president, who’s been more focused on the stock market than any other I can remember, is doing everything he can to keep the stock market higher. He’s trying to keep (the Fed) more on pause.
I think the Fed being on pause, or more looking at cutting rates, is giving people more of a backstop to invest in equities and also more risky assets.
INN: I wonder if there are any parallels to Fed Chair Alan Greenspan’s policies or other market patterns here.
GT: The interesting debate that everyone has in the back of their minds is, “How do we get out of this?” because there was so much stimulus put out in the markets since the global financial crisis, from the quantitative easing, the cutting rates (and) the direct investments in stocks that some central banks have done … and the Fed has, to their credit, hiked rates a few times, I think it’s four in the last year or so.
The big debate is “What do we do in the next recession; where does the stimulus come from?” Also, when things heat up, “How are the markets right to stand on their own?” That is one thing people are concerned about, that we had the attempt from central banks (to) pull away last fall, and we saw what happened in November and December, and that wasn’t pretty. So the big debate in the back of everyone’s mind is when the markets go up and inflation comes back and central banks try to normalize rates, will it be a better experience the next time?
INN: When it comes to corporate debt in the tech sector, how would you relate this to the interest rate environment right now?
GT: In the low rate environment, we are seeing a lot of companies almost take on debt. It is still kind of interesting when you see these massive tech giants that have really pristine balance sheets take on debt and then buy back stock. That’s an interesting phenomenon that I think is a function of a low rate environment. If rates were ever to start going higher, it will be interesting to see how that gets normalized and how that affects their business plans going forward.
INN: Do you see any warning signs in high-interest bonds or corporate bonds?
GT: The high-yield index has really been acting similar to equities. It’s pulled back a little bit. It really isn’t showing any warning signs yet. There’s really no catalyst to show a big recession that’s going to hit these companies. And certainly it’s a bit of a stretch to say we’re going to have a fairly systemic problem in North America when you’re looking at the jobless claims at an all-time low and unemployment rates at a record level. When you have that problem to find people, it’s hard to say we have a recession coming up.
INN: There’s been a lot of IPO activity, especially with Lyft and Uber. What are your thoughts on this and how it relates to sentiment?
GT: We’ve been waiting some time for these unicorns to go public. The fact that they are finally coming is actually a good news story. We’ve been waiting for Uber for years, Lyft most recently and now everyone’s waiting for WeWork to come. I think you have to ask that if they weren’t coming now, when would they ever come with the NASDAQ back at an all-time high? Investors are scrambling for new ideas. I think this is a perfect environment for them to come out.
I think that the concern that we have is that a lot of private equity investors got into these companies and in the private valuations, some were buying at higher levels than what they are trading at right now. That causes some writedowns, and might cause some stress at some of these private equity funds. But I think net-net that these companies that were able to raise money go public — I think it is good news for the space and I think it shows that investor appetite is coming back. You can question the valuation and whether these business models are sustainable, but the fact that they were able to go public in oversubscribed deals is a good sign.
INN: With the recent earnings reports being released for the first quarter, what are you seeing for the first quarter?
GT: We’re definitely seeing that there was a bit of an impact from the trade dispute. I think that the good news is that the impact was a lot less than a lot of people had feared. So while we had a bit of a slowdown in iPhone demand, I think that was well telegraphed and was basically built into the analysts’ expectations. So the street has … been buying the dips in a lot of these companies because a lot of it, outside of a few (companies), was telegraphed quite well and was in line with the expectations.
There is definitely a sentiment that there’s a lot of expectations built on the back half of the year recovery. I still think it’s too early to tell, but the expectations are that the central banks are staying on hold and that the trade disputes are going to get done. The second half of the year will be better than the first half of the year.
INN: It’s interesting to see the relation between the first half of the year and the second half.
INN: Is there anything you would like to add?
GT: We could talk about the idea that, at some point, we could see a bit of rotation from sector leadership. The market has still been focused on the big winning names, the FAANG names that have been going for awhile. I wouldn’t be surprised to see a change in leadership as the markets broaden out and as people get more comfortable with global growth. That’s more of a healthy recovery to keep the markets going, if we were to change the leadership towards some more traditional sectors.
INN: Sectors like consumer staples, for example?
GT: I wouldn’t be surprised to see more of a rotation away from the high-flying software names towards some of the more industrial, financial names, and I think that would be healthy for the overall market. People are looking for more relative value as they get comfortable with the growth picture.
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Securities Disclosure: I, Dorothy Neufeld, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.