March 3, 2021
The prevailing narrative in markets recently has been that rising interest rates would not be an issue for investors, given growth is accelerating and a pick-up in inflation would actually be a good thing.
As discussed over many months now, our view has been this is wrong when it comes to technology stocks because:
1. They represent a significant risk to investors given positioning;
2. They represent a significant risk to the market as a whole given technology’s outsized weighting in the index.
It is equally true that some funds, like Talaria, have a process which will benefit were this to come to pass.
Given the duration of technology stocks (aka high valuation stocks), any rise in inflation expectations and long end rates would see the sector under pressure from a valuation perspective. For while it may be true that rising rates are not bad per se – it’s the relative relationship that matters.
This is not a reflection on the quality of the tech companies represented – it's simply maths.
Source: Bloomberg, S&P, Talaria
So to recap:
In our view, best to stay away from the danger zone.