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After hitting pandemic peaks, many big tech bellwethers have seen their shares tumble so far this year. Vitali Mossounov, Portfolio Manager and Global Technology Analyst at TD Asset Management, explains to Greg Bonnell why investors shouldn’t panic about the outlook for the tech sector.
– Well, after a solid run through the pandemic, technology stocks have been on the back foot for most of this year, but our feature guest today says investors need to stay calm and not panic. Joining us now to discuss, Vitali Mossounov, Global Technology Analyst at TD Asset Management. Vitali, great to have you on the program with us today.
– Good to be on, Greg, and good to see some green on the screen today.
GREG: It is a nice view considering what we have been through as investors. Let’s talk about tech then, right? One of the worst years in memory, you know, apart from today. What are you making of this market?
– Well, it’s a bad market. We’ve got the S&P down 20. We’ve got the NASDAQ down 30 for the year, you know? We could say full stop right after that, right? That’s the reality we’re standing at. And I would say, investors, this year, we’re just standing in front of a train of worries. We’ve got higher rates, of course, creeping up all year, just tightening liquidity conditions in the market.
On top of it all, inflation that’s coming still to some extent from the demand side with goods consumption, but then more recently, inflation from the supply side, of course, because of a geopolitical conflict. So one worry after another, every single month, investors are getting beaten around pretty heavily.
– So, obviously, we’re not going to sugarcoat it. It’s been rough so far. Some worries out there in the market that the worst is yet to come. What are your thoughts on that?
– Well, you know, there’s always this sense of panic that investors get at times like this, right? And every investor has to be a little bit of a psychologist, amateur psychologist, if you will. And I think that, if we ask an amateur psychologist or a professional one, what is the definition of panic, I think it’s an obsession, compulsion with something irrational, right? Something near term. And I think investors right now are very much focusing on that inflation print and going a little crazy about it, right?
And that doesn’t have good news for them in a way, you know? Everything passes, right? It’s only a matter of time, until we’re able to get past this fear. In the meanwhile, what they need to do, what every investor needs to do is really say, look, is this a moment of panic? Or is this a moment to lift your eyes up and look in the horizon towards what matters, what actually your investing objectives are?
– Let’s talk about that. You mentioned horizon. Of course, as investors, we all have different time horizons. The day to day can be pretty hard on us, so what are your thoughts on that longer term?
– Well, longer term, we’re always going back to the same thing. What are you buying, right? And I think a lot of investors, a lot of even speculators came into the market during the course of 2020, 2021, and for them, an investment was just a piece of paper. It was just the promise of gains.
I think what we need to remember as investors is we’re buying pieces of companies here who are buying a claim on the future free cash flows of that business, and therefore, we really care about some of the things that could be forgotten in euphoric times, right? The quality of management, the moat around the business.
So any investor right now needs to look at things and ask themselves, is it really inflation that I should be focused on, this near term indicator of prices? Or do I need to zoom out a little and think maybe about what it is that I own? And how does this business fare over three, five, 10 years?
– For those people who are, perhaps, taking a bit more of a worried look at that horizon, they think back to the financial crisis. They think back to 2009 and fear that we’re going to see a crash of that magnitude. I mean, what would you answer to that?
– Well, any outcome is possible. That’s always the case. But today, people, I think, need to be careful, where we still got that– I think they called it an anchoring bias to 2008. Whenever something goes bad, you’ll hear everybody in the room say, well, what about ’08, right? And there could always be an ’08 or parallel to ’08. But when we examine the probabilities of that happening, the future is probability-based.
With the state of the US housing market, and in general, the estate of the economy, that’s not the base case that we should gravitate to. The real debate is, are we going to get through this with a soft landing without a recession, or are we probably going to have a typical recession? And remember, in a typical recession, earnings contract 10%, 15%, not the 40% that they did in 2008, 2009, which led, of course, to the big crash. So I’d say, again, be careful letting panic anchor you to past events that are not pertinent necessarily.
– You’ve mentioned inflation a couple of times. You cannot get away from the inflation story as investors this year, but it’s always taken as a negative, isn’t it, Vitali? You say, inflation is going to do this, and then this is going to happen.
This is going to happen. Are there certain sectors? Are there certain names that inflation isn’t the worst thing in the world?
– Well, inflation, if we’re looking at inflation today and seeing what it’s driving, of course, we’re seeing, objectively, it’s driving higher discount rates in the economy, higher interest rates, which is making that stream of future earnings less valuable. And that’s hitting stocks. That’s just the empirical reality.
But the point I’m trying to make is that the very same inflation that we may be seeing today as a burden is actually a benefit to many companies business models, and it might sound a bit strange.
So I’ll give you a practical example of that. You take two of the largest business, really, in the United States and the world, Visa and Mastercard, these are credit card networks, and their business model is quite elegant. Whenever you have a spend, you buy a cup of coffee for $2, they take a little sliver of that, a little percentage. Nobody ever notices.
If that cup of coffee was to go from $2 to $3, well, the majority of that increase, guess what, Visa’s still taking the same percentage just off a greater amount. On the other side of their call it ledger, they don’t have too many costs involved in their business. So a company like that wins in an inflationary environment, and they’re not the only one.
– That’s a key point, I think, you’re raising about any kind of investing in any kind of environment. You’ve really got to think about the names that you’re in and think about how the different conditions out there affect different companies differently.
– That’s exactly it. I think you summed it up, and I almost have nothing to add. But we tend to panic. All the correlations, they go to one, and every single asset class, every single stock, the baby gets thrown with the proverbial bathwater, thrown out.
So I completely agree. And it’s a great time to be thoughtful, to be an investor, and actually get involved in understanding business models and how exactly companies are going to benefit or suffer in this environment. But the game has changed. The rules of the games have changed, and it takes more thought than ever to participate.
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