Stocks with the disruptive technology classification and the related exchange traded funds are flailing this year, and inflation is playing a part in those slumps.
Four-decade-high inflation is prompting the Federal Reserve to engage in one of its most intense rate-hiking regimes in years. Historically, higher interest rates make the future cash flows of growth companies less attractive because investors can grab higher bonds in a less risky fashion today.
That precedent is proving to be a drag on ETFs such as the Goldman Sachs Future Tech Leaders Equity ETF (GTEK). However, investors willing to see the forest through the trees could later be rewarded by GTEK, and inflation could be a reason.
“In today’s inflationary environment, companies will need to do more with less and identify solutions to bottlenecks and inefficiencies. We believe this will increase demand for key next-generation technology solutions. Morgan Stanley’s latest CIO Survey found that, on average, CIOs expected their technology budgets to grow by 4.5% in 2022,” according to research from Goldman Sachs Asset Management (GSAM).
In other words, inflation or not, companies still need to invest in essential technologies, including cloud computing and cybersecurity. That’s to the benefit of many GTEK components, many of which are smaller or mid-sized firms – the types of companies that can often be squeezed by inflation.
“The current inflationary environment has proven especially challenging for small- and medium-sized enterprises (SMEs), as they often lack the time, budget, and technical teams to connect to their customers, increase their office productivity, and drive revenue expansion,” adds GSAM. “Cloud-based marketing and sales solutions can provide clear visibility to SMEs across the customer journey and highlight tangible catalysts to business growth. We believe these solutions can quickly increase SMEs’ traffic and contract value and decrease customer churn.”
Another point that’s being overlooked as rising rates pinch technology stocks is that some equities in this group, including some GTEK member firms, enjoy pricing power. That ties in with the aforementioned point of essential spending. There are just some products and services companies can’t skimp, and those products’ purveyors know as much and can raise prices in inflationary environments.
“Demand for truly innovative products and services is often less discretionary, and therefore more inelastic than it is for traditional goods and services. Cybersecurity solutions are a key example of this,” concludes GSAM.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
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