By Sam Boughedda
A UBS analyst cautioned in a note to clients Friday that investors shouldn't chase the tech rally.
US tech shares have rallied in recent months, with the Nasdaq (NASDAQ:NDAQ) and the NYSE FANG+TM index up close to 20% from their respective mid-June lows.
The analyst said many of the drivers behind this outperformance are clear: major tech earnings beat expectations, long-term inflation fears (and yields) have receded from recent highs, and risk sentiment is improving. However, the analyst explained that at the same time, the Federal Reserve is still hiking rates into very-elevated inflation, the global economy is slowing, and recession risks remain unresolved.
"Don't chase the rally—use it to reduce excess exposure," the analyst wrote. "Global tech valuations have bounced from their second-quarter lows, and are now trading slightly above their 5-year average against global equities. We suggest investors use the rally in tech to reduce positioning in excess of recommended benchmarks and to lighten portfolio exposure to high beta names, rebalancing funds to our preferred areas of the market like value and quality income."
The analyst believes tech industries like semiconductors, hardware, and digital media may be more at risk if macro conditions worsen or if there is a renewed tech correction. However, he feels e-commerce should be more resilient, while UBS sees value in "selective exposure to thematic trends, like cybersecurity, automation, and robotics."
"Take advantage of tech sector volatility. Instead of taking outright positions in tech, investors may also consider structured strategies that aim to limit downside risks while still generating yield and allowing participation in near-term rallies."