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'shake-out' predict

Tech rout is just a ‘shake-out’: Top CEOs predict what’s next for markets

Monitors display stock market information at the Nasdaq MarketSite in New York, on Friday, Jan. 21, 2022.

Michael Nagle | Bloomberg | Getty Images

Top CEOs and investors have struck an optimistic tone on the recent sell-off global technology stocks, telling CNBC it’s unlikely to metastasize into a broader market crisis.

The tech-heavy Nasdaq 100 index closed Monday’s trading down more than 26% year-to-date and earlier this month — after the Federal Reserve raised interest rates — the world’s largest technology companies shed over $1 trillion in value in just three trading sessions.

Tech and growth stocks have been hit hard by the prospect of higher rates, as the Fed and other major central banks around the world look to rein in soaring inflation by tightening monetary policy.

The sudden downturn for high-growth tech stocks – widely seen as overvalued at the market peak in late 2021 – has led some commentators to voice concerns about a tech-driven crash similar to that of the “dotcom bubble” bursting in 1999/2000.

“Clearly there is a question of what should the exact market value be of some of these models, but the underlying business models are true business models — not only now but for the future, in terms of delivering services, advice and what have you digitally,” UBS CEO Ralph Hamers told CNBC at the World Economic Forum in Davos, Switzerland on Monday.

“It is a trend that is supported by demographics and accelerated by client behavioral change. So whether it is in consumer services or in financial services or whatever, I do think that the technology business models, the ones that are digital, still are the right ones going forward because they are real business models.”

While some analysts have suggested that sentiment towards the tech sector is at its worst point since the dotcom bubble, as rising rates force companies to become profitable faster, they have also highlighted that long-term opportunities still exist for investors. 

“It is not like 20 years ago in [the dotcom bubble]. We had some models that were just models on paper and not real,” Hamers added. “The last 20 years, we have been able to show that there are real changes happening in retail businesses, in financial businesses etc., and that trend is not going to stop because of what we see currently.”

His comments echoed those of Credit Suisse Chairman Axel Lehmann on Monday, who told CNBC that investors should retain a long-term perspective despite the temporary “shake-out” of tech stocks, as many companies within the sector are still “solid and sound.”

“The valuation levels have come down, basically, in all stock markets, but the profits are still there of the companies, so we see a little bit of a shake out that is happening,” Lehmann said, noting that while there were similarities to the dotcom bubble, the underlying trends are now more supportive.

“A lot of companies probably will disappear, but we should not think that the fundamental trends will [not] still remain, that technology and digitization will be important, new business models – these are the key themes that as business leaders, we all need to be very mindful of.” 

A ‘remarkably orderly’ sell-off

The U.S. Federal Reserve has said it will not hesitate to keep hiking interest rates until inflation comes down towards a healthy level, and its hawkish pivot in the face of stark global price increases has, in part, driven the exodus from tech stocks.

However, billionaire investor and co-founder of private equity firm Carlyle Group David Rubenstein said Monday that the markets have been “overreacting” despite the Fed’s efforts to manage expectations.

“In the crash of 1999, 2000, 2001, you had internet companies with no revenues, obviously no earnings. They had nothing but a business plan in some cases, and those companies shouldn’t have gone public, let alone maybe been getting any capital,” Rubenstein said on a WEF panel chaired by CNBC.

“Now, you’ve got a company like Netflix which has 250 million subscribers. It may not be worth what it was worth in the market a few months ago, but it’s certainly worth more in my view than what it’s currently trading for.”

Rubenstein added that when markets “overreact” — as they have been — there is opportunity for investors to go in and “buy at the bottom.”

Netflix stock has plunged almost 69% year-to-date, while fellow tech titan Amazon is down more than 35%.

“A lot of these companies whose values have gone down recently are still great companies, and maybe the value has been overreacted by the market. I think there are some great buys there, I don’t think it’s at all a case of where we were in 1999/2000.”

Despite the sharp declines so far this year, Citigroup CEO Jane Fraser noted during Monday’s panel in Davos that the sell-off in the U.S., from the Wall Street bank’s perspective, has been “remarkably orderly” amongst investors.

“They have not sprinted to the door the way they have with the world financial crisis when that crash happened, and where we were in 2020. We have seen a fairly systematic takedown and change in asset allocation,” Fraser said.

She highlighted that fixed income issuances across both corporates and sovereigns have remained “fairly constructive” and that market indicators show the recent downturn was more likely a “necessary correction” than a wholesale crash.

“There isn’t so much strain yet – we’ve seen some in commodities, we’ve seen a bit in high yield – but this hasn’t been the catastrophe it could have been,” she concluded.

High growth, high disappointment

Part of the reason valuations have fallen so far and fast this year is because of the rate of profit growth in the technology sector over recent years, according to Maurice Levy, chairman of the board at French advertising giant Publicis Groupe. He said the companies had set the bar deceptively high come earnings season.

“It is a sector which has been growing by 30% to 50% and when they are growing only by 25% or 15%, there is a disappointment and then you see the stock sinking. So, we should not take that sector as a barometer because expectation in tech is very high,” Levy told CNBC.

“We have to be relatively calm when we look at those numbers and with a longer view. For the time being, when you look at the telcos and you look at all the people who are investing in advertising, the numbers are still pretty good.”

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