Why are technology companies down in the stock market?

The start of the new financial year has been marked by an unusual phenomenon in the financial markets: European stock markets are performing better than Wall Street. Alberto Matellán, chief economist of MAPFRE Inversión, explains on Radio Intereconomía that this gap in performance between indexes on either side of the Atlantic is due to the fact that the companies that were down the most in January were those that had performed better in 2021 and mainly technology companies, for two reasons. First, because a more aggressive monetary policy is being applied and this more acutely affects companies that are not reliably earning long-term profits. And, secondly, it is due to the weight of passive management, which causes substantial volatility in firms with the largest capitalization in the markets. However, despite this first setback, Matellán still sees an upside in the sector. “It was a good year in 2021, but they haven't necessarily peaked. Some specific companies may likely have peaked, but the technology market has yet to translate into profits the enormous liquidity has been generated in recent years.”

In the fixed income market, the yield on the German Bund has returned to positive territory, while that of the Spanish bond has reached 0.8% and that of the US, 1.8%. Will this trend continue? “With the current scenario, curves should rise moderately. And it is important to emphasize in moderately, that is, in the form of steps,” Matellán points out. “In January, there were jumps of 40 basis points and the curve should stabilize at those levels until there is a further shift in expectations. This will depend on what we see in terms of growth, inflation and monetary policy over the next three months,” he adds. However, remember that U.S. Treasury bills at 2.20% or 2.25% by the end of the year will still be at very low levels historically. “We are seeing a normalization of curves,” he concludes.

Meanwhile, inflation continues to surprise on the upside. In fact, the Eurozone CPI stood at 5.1% year-on-year. Matellán continues to see the explanation for this upturn almost entirely in energy prices. And energy prices depend, in turn, on political decisions: both international ones, such as the crisis in Ukraine, and domestic ones related to the management of the retail market by each government. “We aren’t seeing domestic pressures in Europe; in fact, underlying inflation is down, although that doesn't detract from the fact that CPI is still high and we should be mindful of this,” he explains. Moreover, inflation determines many key decisions, such as monetary policy moves, and its direction is influenced by volatile prices such as that of oil. In this regard, Matellán does not rule out the possibility that the barrel will reach 100 dollars precisely because the conditions are in place for it to continue rising: the rising demand, increasing growth and, in the short term, political decisions, moves by OPEC or geopolitical tensions.

In this context of increasing volatility, the MAPFRE Inversión economist recommends not touching portfolios, whether you have done your homework or not. There is still a greater bias towards equities, because positive earnings growth is expected, “but we have been recommending greater prudence for months, which does not mean increasing the weight of fixed income, but of cash.”