Hold tight on tech stocks but don’t focus on wider indices, top banks say

Investors should stay in the tech market and use the sell-off to ease into markets through defensive entry strategies, UBS said. Stocks suffered a pullback, with S&P 500 and the Nasdaq down 3.5% and 5% respectively last Thursday, due to a rotation out of tech after reaching a record high earlier in the week. READ: UK tech stocks pull back with US tech sell-off The sell-off was exacerbated by option-related selling, while the lack of progress on a further US fiscal stimulus bill may also be causing investor concern, particularly with Federal Reserve officials highlighting the need for additional fiscal measures to maintain the pace of the recovery. However, the Swiss bank noted the stocks could be pushed even higher by Federal Reserve liquidity, and the economic recovery are still supporting stocks, while positive medical developments, sizable stimulus, and a further fall in real rates. Conversely, Morgan Stanley noted the rally in stocks this summer was mostly due to earnings estimates rising and advised investors not to focus on the S&P 500 or Nasdaq 100 indices “as both are likely to be range-bound for the rest of the year”. What to pick “Pick stocks where next 12-month EPS estimates are likely to increase more than 10% over the next 3-4 months. We continue to believe the best-hunting grounds for such stocks are smaller companies levered to a further reopening of the economy.” Meanwhile, UBS said growth are expensive and recommended investors with excess exposure to them to “consider rebalancing into relative laggards in the upswing, and areas accelerated by COVID-19”. “This includes tech disruptors, such as platform companies with network effects and tech enablers exposed to trends like cloud, Big Data, AI, and 5G,” analysts continued. UBS also highlighted the potential of companies exposed to a ‘green recovery’, including sectors such as renewable energy, which will account for around 80% of the entire share of investments in power-generating capacity from today to 2050, according to Bloomberg. “US midcap stocks should also perform well as investors grow more confident in a broadening economic recovery,” the bank concluded.