Schroders remains bullish on UK tech stocks despite their high valuations and the threat of rising i...
Schroders remains bullish on UK tech stocks despite their high valuations and the threat of rising interest rates.
Humphrey van der Klugt, manager of the Schroder UK Equity unit trust, said tech share prices are being driven by an excess of demand over supply and even if rates rose to 7% this would not be enough to halt momentum in the sector.
ARM is currently on a P/E ratio of 1306 times and saw its share price rise by 736.83% in the 12 months to 27 January. Logica is on a P/E of 159 times and the company's share price increased by 193.71% in the last 12 months. This compares with a P/E ratio of 29.04 times on the FTSE 100, which rose by 9.71% in the 12 months to 27 January. Van der Klugt has a 3% portfolio exposure to ARM.
He said: "Of course interest rates and long bond yields are important because there is a relationship between the valuation of equity and bond markets.
"In the short term it is going to take more than the rise in interest rates that economists are talking about to stop the momentum that we are seeing in this sector. I think it is correct to be well weighted in this sector and wrong to be too cautious."
A major factor van der Klugt is monitoring for the future is when technology companies start looking to refinance and issue new shares. He said too many businesses are not producing much revenue but have large advertising expenditure.
Van der Klugt said that although he is not expecting a flood of refinancing moves by technology companies, the issuing of many new shares on the market may impact on share prices in the sector, particularly for those technology companies which continue to fail to produce good revenues.
Dominic Wallington, who runs Credit Suisse Income and Credit Suisse Monthly Income Portfolio, is more cautious on the technology sector and said that he is already concerned about the level of valuations.
Wallington said: "In valuing technology stocks people are assuming higher than normal earnings growth for very long periods of time. People think that they know what is going to happen in the next 10 years to the earnings of these companies."
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