4 key supports and 4 key problems in Tech for 2024 – UBS (NYSEARCA:XLK)

UBS in its Global Equity Strategy 2024 Outlook report, published on Monday, outlined eight remarks that would affect the technology sector (NYSEARCA:XLK) this year.

These are four key supports for tech:

• Investments in tech (XLK) are low. “The danger signal is over-investment, and we don’t have this,” analysts said.
• Historically, falling U.S. index-linked bonds (30YTIPS), (10YTIPS), (5YTIPS) affects the tech sector (XLK) since it’s the most sensitive sector to the move in the TIPS yield, “but this seems to have been discounted by performance.”
• Tech (XLK) has high growth and high quality, in terms of ROE (return on equity) over ROE volatility for semis.
• Finally, late-cycle bull markets often see a bubble in growth. “We have a 35% chance of a Nifty 50 Index (NIFTY), TMT-style bubble.”

And these are four problems in tech:

• Tech (XLK) margins have consistently risen. Analysts said they believe a continued rise is unsustainable because it can cause a tax backlash, more competition, or having free cash flow not be able to be reinvested as return on invested capital falls.
• Tech outperforms when ISM is rising and underperforms if ISM falls below 50. “We don’t see a large rise in ISM, and anyway for semis this is discounted, analysts said. In addition, UBS forecasts a recession starting in the second quarter of 2024.
• Tech’s share of market cap is above the largest sector. “We think it is different from TMT because valuation is much less problematic and there is no clear-cut overinvestment.”
• Valuation is demanding. Areas liked by UBS include software, parts of the semi cycle (TSMC and SEC, ASML), Chinese tech, and cyber security, “where the amount spent on cyber at $200B is a fraction of the potential market” of about $1.5-2T.

Some key buy-rated in cyber security, according to UBS, are: Zscaler (ZS), Tenable (TENB), CrowdStrike (CRWD) and CyberArk Software (CYBR).