Cost of living turbulence means tech firms have had to rethink strategy to win market confidence
Technology shares rose substantially during 2020 and 2021, driven by a lockdown induced increase in online activity, and exacerbated through huge amounts of quantitative easing money ($4.5 trillion in the US alone between March 2020 and Sep 2021) looking for a home. This led to technology stocks reaching an all-time high by November 2021.
At that point investors began speculating that interest rates may have to rise to contain growing inflation, and higher interest rates have an outsized negative effect on technology stocks as they reduce the future cash flows on which technology companies are valued. Share prices duly began to fall and the technology sector, at its all-time highs, had further to fall than most.
In early 2022 central banks did indeed begin to increase interest rates and a reduction in spending from the cost of living crisis; increased energy, borrowing and staff costs; and specific issues such as the global microchip shortage all added to the sector’s woes. The Nasdaq, the stock market on which the world’s biggest and best technology stocks are listed, and a barometer for the health of the global technology market, has declined 30% in the past year. The technology sector in the UK is down a similar 28%.
Investment journalists have been savvy to this situation with some stating from the beginning of 2022 that they were moving away from covering growth stocks, such as technology, to more defensive plays, such as energy companies or dividend-paying stocks, as a hedge against rising inflation. Journalists also became wary of reporting positively on technology companies until any upcoming results were in the market, owing to a perceived increase in the potential for forecasts to be missed.
More than ever, then, firms have had to demonstrate resilience to macro-trends, or specifically address issues affecting the markets. For example, online advertising solutions provider, CentralNic, has significantly beaten forecasts four quarters in a row, even as the digital advertising market slowed down from a record 2021. This is because its solutions don’t make use of personal information and internet users are becoming ever more privacy conscious. Meanwhile, Microlise’s software helps hauliers reduce fuel consumption by optimally routing fleets, an attractive offering in a time of spiralling energy costs.
This article was featured as part of SEC Newgate’s The Reputational Risks of the Cost of Living. To read the full document, click here.