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Kingswood Can tech and AI maintain their growth?

In this article, Rupert Thompson, chief investment officer at Kingswood, explores some of the recent and upcoming events that may influence the performance of tech and other equities.

Global equities have paused for breath and ended last week down slightly. Following their strong run of late, with markets up 10% since the start of the year, a pause or even a correction was looking overdue. The last meaningful setback was in late February, which saw markets temporarily fall back around 4%.

We are also fast approaching what is typically a rather less favourable time of the year for equities. Somewhat surprisingly, the old financial adage “sell in May and go away, and come back on St Leger's Day” has had a rather better track record over the years than one might think. The St Leger horse-race incidentally takes place in mid-September.

Moving swiftly on from the realms of technical analysis and fortune-telling to hard economic news, last week saw the release of some strong numbers. UK retail sales posted a much larger than expected 5.4% bounce in March despite non-essential retailers still being closed. In fact, highlighting how much our shopping habits have changed, sales volumes in March were back up to pre-COVID-19 levels.

The encouraging news continued, with UK business confidence in April hitting its highest level since 2013. Confidence is not as high as in the US, where it has been boosted by the massive fiscal stimulus, but still points to a rapid recovery in the UK economy over coming months. In Europe, by contrast, optimism unsurprisingly remained lower due to the slow vaccine roll-out.

Strong economic numbers are very much now what the market is already pricing in. So, the scope for positive surprises to propel equities higher is considerably smaller than before. Still, the US earnings season is on course to provide a very pleasant surprise. Earnings of the financial sector beat expectations significantly and this week it is the turn of the tech sector to deliver the goods.

Most of the tech giants are reporting over the next few days. The question is not whether their numbers will be strong, as this is all but guaranteed, with lockdowns seeing significant opportunities emerge for these companies. Rather, it is just a matter of whether they beat expectations and by how much.

"It is just a matter of whether they [tech firms] beat expectations and by how much"

The market’s focus in recent months has swung away from growth to value stocks and from the lockdown winners to the losers. But despite this shift, notwithstanding a few wobbles, the tech sector has still managed to perform broadly in line with the wider market.

Even though the sector faces increased regulatory and tax headwinds, it remains a major secular growth story and source of disruption for other areas. For this reason, we continue to maintain our allocations in tech and artificial intelligence (AI).

US president Joe Biden’s fiscal initiatives — notably the two massive stimulus packages — have until recently been greeted with unadulterated enthusiasm by the markets. His latest plans, by contrast, are being viewed with a bit more trepidation, as they will be financed by tax hikes. The $2trn of infrastructure spending included in the American Jobs Plan is to be paid for by higher corporation taxes, most notably a hike in the corporate tax rate from 21% to 28%.

As for his latest proposal, the American Families Plan, the intention is to pay for this with personal tax hikes. Last week saw news that this included a proposed rise in the tax rate on capital gains and dividends from 20% to just under 40% for the highest earning individuals.

The prospect of a higher capital gains tax rate may well provoke some selling of US equities over coming months. However, past experience is that such hikes only ever represent a temporary drag on markets. While equities look unlikely to continue their recent rapid upward march, they do still have capacity for further gains. Prospective returns remain significantly higher for equities than for bonds. 

This article was originally written and published by Kingswood on 26 April. Visit the investment firm’s insights page for more information.

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