Stocks have cycles, and technology stocks are no exception. Morgan Stanley said in a research report on May 12 that Asia-Pacific technology stocks are in the stage of cyclical pullback that began in the fourth quarter of 2021. Looking ahead, Morgan Stanley believes that there is still room for downside in Asia-Pacific technology stocks in the second half of the year, and if the Fed continues to raise interest rates aggressively, the recession is expected to move forward.

The withdrawal cycle in 2022 is even worse.

As can be seen from the trend chart below, MSCI Asia Tech (Asia Science and Technology Index) takes a cycle script similar to that of 2018 in 2022, but has a completely different external macro environment. The big motorcycle analysis said:

2022The current round of withdrawal in 2008 may be better than 2018.The situation was even worse in 2008, mainly due to Federal Reserve put options (Fed put).

In addition, the current downward trend may be in direct proportion to the excessive rise caused by the COVID-19 epidemic bubble.

Morgan Stanley concluded that the reason why this pullback may be worse than the previous cycle is:

1. The end of the easy money cycle (Fed put options have been withdrawn)

2. The growth of science and technology demand led by COVID-19 's epidemic situation returned to normal.

3. Science and technology cycle risk

4. There may be a more serious situation, that is, a recession.

In addition, Morgan Stanley stock analyst Shawn Kim also pointed out the law of cycle for investors in a research report:

After reaching the peak of the cycle, the stock price will no longer provide positive feedback on the good news, and the valuation multiple will decline.

Once the market bottoms out, the opposite is true. Share prices will no longer fall because of bad news, and valuation multiples will rise.

These are usually characterized by overreaction in both directions.

The following chart shows that the price-to-earnings ratio peaked at 21.5 times in February and has fallen to 13 times below its pre-epidemic level, compared with 10 times in a pessimistic scenario. So Dama believes thatValuations have normalized, but profits have not returned to normal.

There is no panic in the market at the moment, and this is usually what happens before the market collapses completely, and we don't think the market is there yet.

Large rallies in bear markets and countertrend rallies dominated by short covering are common, but all of these are part of a cyclical pullback in a continuing trend of weakness.

Risks of Asia-Pacific Technology stocks

At present, the Asia-Pacific stock market is facing a challenging market environment. For example, persistently high inflation, aggressive interest rate hikes by major central banks around the world, especially the Federal Reserve, the impact of the conflict between Russia and Ukraine on the supply chain, and the pressure on consumer spending caused by a new global epidemic.

Therefore, Morgan Stanley believes that the risk of Asia-Pacific technology stocks isAs the stock market slumps, potential negative feedback could undermine tech companies' earnings growth, leading to budget revaluations, followed by layoffs, eventually slowing consumption and profits.

Looking forward to the trend of Asia-Pacific technology stocks in the second half of the year, Shawn Kim believes that there is still room for downside. He said:

Recession risk is expected for 2023, not for the next few quarters.But if tight financial conditions (falling stocks, rising interest rates and the dollar rising to a 20-year high) persist, the recession scenario could become a reality in a few quarters.

If earnings fall by 5-10%, the valuation will be set at 10-13 times, which is more reasonable during the market pullback.

Shawn Kim said that in the overall depressed market environment, the performance is not so bad is good. He pointed out:

Many companies in technology stocks made good profits in the first quarter, but the guidance hit the performance of technology stocks in many ways.

Share prices reflect the combination of earnings and valuation, and earnings per share are unlikely to have a positive offsetting effect on share prices in the second half of the year and 2023.

Edit / Annie