Published in CityAM (thanks to Liam Ward Proud) and broadcast on CNBC.
This recent pullback is healthy and the sector as a whole not a bubble to ‘burst’.
As a market correction, not a crash, it has reigned in valuations that had become stretched in places. At the same time, rather than straight out selling, there has been a rotation towards more defensive names. This continued buying indicates the determination of investors to find attractive opportunities within the space.
Furthermore, while the IPO market has arguably got too ‘hot’, with over-hyped high profile companies coming to market without a clear strategy for profit generation, this is not true of the sector as a whole. Instead, there are many cash rich companies with strong distribution platforms and clarity on future revenue streams that are now priced more attractively.
While the economic recovery remains warm but not ‘rate rise hot’, technology firms are in a ‘sweet spot’. As a reliance of industry on technology grows, IT spend is resurging.
How to Trade It: Goldilocks and the 3 Bears
Watch for broad-based ETF selling, which forces the sale of high quality companies alongside the weaker names. While Goldilocks would be pleased that the economic recovery is at ‘just the right temperature’, the 3 Bears would point to valuation, momentum and sentiment starting to struggle. Nevertheless, this offers the opportunity to exploit more reasonable entry points for buying the type of firms mentioned above.
Watch the debate on CNBC