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Key points
- The ASX All-Tech index rose over 2021, but has still lost 15% since November
- One expert reckons 2022 will again be rocky for the sector
- But there is one subset of tech that could still do okay
It's been a turbulent time for technology shares in the past year.
To demonstrate, the S&P/ASX All Technology Index (ASX: XTX) rose 3.72% last year, but the sector has sunk more than 15% since its November high.
The combination of new variants of COVID-19, strong inflation and the prospect of rising interest rates has investors nervous about holding tech stocks.
We know that, in the real world, technology adoption is ploughing ahead. So how does one invest in it on the stock market within the current volatile environment?
'Tech sector to again be challenged'
Principal Global Investors chief strategist Seema Shah forecasts that "parts of the tech sector" will "again be challenged" in 2022.
"Given tech's stellar run, investors may be waiting for the other shoe to drop," she said.
"As financial conditions tighten and pandemic headwinds ease, cyclical conditions become increasingly unfavourable for the sector."
However, generalising an entire industry is always dangerous.
Shah pointed out exactly what type of tech companies would stumble this year.
"Certainly, in this environment, profitless firms, such as those represented by the Goldman Sachs Non-Profitable Tech Index, will struggle as profit margins are stressed further," she said.
"Additionally, these unprofitable companies are particularly vulnerable to rising rates, as they derive almost all their present value from future cash flows."
So which tech companies might resist the correction?
Shah said that "not all tech is created equal" and that there would be some companies in that sector that would simply power ahead.
"Mega-cap tech firms, such as the FAANGs (Meta Platforms Inc (NASDAQ: FB), Apple Inc (NASDAQ: AAPL), Amazon.com Inc (NASDAQ: AMZN), Netflix Inc (NASDAQ: NFLX), and Alphabet Inc (NASDAQ: GOOGL)), who already generate huge cash flows, exhibit strong pricing power, and offer impressive earnings delivery, should be significantly more resilient."
For the past 10 years, investors have had a fruitful run with tech.
From now, according to Shah, it will not be so easy to make returns and one will have to be more selective.
"While conditions for the sector are becoming trickier, strong companies with robust balance sheets and pricing power still have further to run," she said.
"For the profitless ones, tech-nically speaking, the period ahead may not be so pretty."
The "be discriminating" message is similar to one that local expert and Cyan portfolio manager Dean Fergie espoused to clients last week.
He picked out 2 ASX tech shares that went against the grain and gained value over the month of December.
Fergie's fund will continue to hold that pair, as they both possess attributes that are distinct from the rest of the pack.
