Tech changes?
Large US technology companies have been among the most sharply sold off assets in 2022 so far.
Despite this repricing, the sector remains one of the most expensive when looking at traditional valuation metrics, though there are some opportunities, Papesh says.
“There are some specific companies we think have wrongly been caught up with the broader sell-off within the tech space – Qualcomm for example – but at the broader sector level, multiples are still high versus the rest of the market and the cash flows of many of these businesses are going to slow along with the rest of the economy.”
The small cap end of the market is looking attractive, Papesh says, as they are trading at historically low valuations compared to large cap competitors, reflecting investors’ concerns of a looming recession.
But earnings are still holding up and are likely to improve once the economic outlook stabilises, he adds.
“Coming out of past market downturns, smaller cap companies have typically led the recovery… the move from the lows typically occurs quickly, and it’s important that investors have exposure to the space at the inflection point.”
It is worth remembering that companies that fall into the small and mid cap buckets in the US are much bigger than their counterparts in the UK.
Mid-cap can be anywhere from $250mn to $48bn, says Rupert Rucker, global investment director at Schroders.
“A US small cap is a large cap in Europe.”
The lower valuations of small-cap companies mean that when accounting for the future impact of a higher cost of capital they look much more reasonably priced than large caps.
“Everything has been valued sensibly for years, such that if you get surprises you will not see huge reactions to share prices,” Rucker says.
A few themes to look into are healthcare and domestic manufacturing, he adds.
“Home health care is a growing sector, it has suffered a labour shortage but that is beginning to mitigate,” he says.
Ben Kumar, senior investment strategist at 7IM, agrees that healthcare is the sector society will continue to focus on, and will see long-term growth as a result.
“In a recession, you are going to cut back your spending on lattes and iPhones, but you will still pay for your medication and you will still go to hospital if you need to, and all of that finds its way to the bottom line.”
