Investors shouldn’t rush back to big tech stocks as reflation and reopening trades are better near-term bets, says UBS

Mark
Facebook CEO Mark Zuckerberg. Photo by Drew Angerer/Getty Images
  • Investors shouldn’t rush back into buying stocks in big tech companies, the wealth management team at UBS said in Monday note.
  • Tech stocks will face another rise in bond yields and the industry will be dealing with near-term regulatory headwinds.
  • House lawmakers last week introduced five bills at aimed addressing antitrust concerns.
  • See more stories on Insider’s business page.

Investors should hold off on diving back into shares of large technology companies as the industry faces regulatory challenges and will be hurt again by rising borrowing costs, according to the wealth management team at UBS.

Major technology shares overall have recovered from their lows of the year. High-flying tech stocks were ditched by investors earlier in the year as buyers sought companies they believed have more direct exposure to the reopening of the economy. The Nasdaq Composite is up about 10% so far this year and the NYSE FAANG+ index that tracks mega-cap tech stocks has picked up about 9%.

But a move back into tech stock may be a misstep for investors in the short-run, UBS said.

“We don’t think investors should rush back into big tech, with the tactical outlook favoring reflation and reopening beneficiaries like financials and energy,” said Mark Haefele, chief investment officer of global wealth management at UBS, in a note published Monday.

One reason for the view is that UBS expects yields on government bonds to begin rising again. That could spell another round of trouble for tech stocks after the closely watched 10-year yield earlier this year quickly zoomed up to a 14-month high of 1.76%. The jump to the peak in March stemmed from investors selling bonds and pursuing riskier assets as coronavirus vaccinations and government spending plans fostered strong growth prospects for the world’s largest economy. But the higher yields stoked worries that higher borrowing costs would hurt technology companies.

Yields have pulled back from their highs as investors appeared to have embraced the Federal Reserve’s view that hot inflation levels will be temporary and that it will stick with measures to support economic growth. UBS, however, said it believes yields will begin gradually rising again to the detriment of tech shares.

Also, “we think that US antitrust developments could pose near-term headline risk for tech stocks,” said Haefele.

Last week, House lawmakers introduced five bills aimed at giving regulators more power to control tech companies from holding too much market dominance and the bills have some bipartisan support. The legislation is aimed at Amazon, Apple, Facebook and Alphabet, Google’s parent company, which in recent years have faced heavy scrutiny related to antitrust concerns.

“So within a portfolio context, we think investors should consider allocating to growth and technology via private equity holdings,” as the investment case for the tech industry is still sound on a longer-term basis, said UBS.

It said global tech acquisitions within private equity rose to $82 billion in the first quarter, marking an all-time high for a quarter, and were up by 144% compared with the first quarter in 2020.

“With approximately 497,000 global private tech companies, the breadth of investable companies is vast compared to the roughly 8,100 publicly held tech firms,” UBS said.