Interest rate cuts are like waiting for food when you’re sitting in a particularly busy restaurant – they are not on the table yet, but you have been promised they are coming.
That seemed to be the takeaway from central banks this week, with the Bank of England and Federal Reserve opting to keep rates stationary and experts forecasting the next move will be to cut rates.
Inflation remains above ideal levels, but is on the way down (excluding the UK’s surprise December figure) and the BofE said it could hit the 2% target in the coming months.
Many believe this would give it the ammunition to start reducing the Bank rate – or to continue the food analogy, finally get inflation cooled to be palatable.
Meanwhile, in the US, rhetoric around further rate hikes is off the table and dovish policy is back on the menu.
Investors may be looking to the future, according to data from interactive investor. L&G Global Technology Index was the most bought fund across ii’s platform in January, while the tech-heavy Scottish Mortgage topped the trust list, joined in the top 10 by Polar Capital Technology and Allianz Technology.
In theory, tech should work best when there is very low inflation or even deflation. Conversely higher inflation, and therefore higher interest rates, means investors can get good returns now from low-risk assets, meaning they do not have to pay for future projected returns.
As such, the tide turning from a rapid interest rate hiking cycle to a cutting one should be beneficial for growth stocks in general, and technology names more specifically.
Ben Rogoff, manager of Polar Capital Technology Trust, told Trustnet he believes the world has changed, but that central banks will revert back to the old ranges of the past decade eventually – although he admitted he did not have a “strong conviction” on monetary policy.
Tech stocks confounded the critics last year, rising despite higher rates on the back of an artificial intelligence boom, which particularly boosted the so-called ‘Magnificent Seven’ stocks including the likes of phone maker Apple, online retailer Amazon and computer chip manufacturer Nvidia.
Rogoff added that although the sector isn’t typically associated with inflation, there are a lot of borderline monopolies within tech, which means those companies have pricing power, so can pass on costs to consumers.
They also have little debt, which means they will not be hit by sharp increases to their interest payments on loans. In fact, the opposite is the case; the largest tech companies have built up huge stockpiles of cash from which they are earning decent yields.
But is tech worth adding to your portfolio now? I sold my position in Polar Capital Technology Trust last year, choosing to simplify my ISA, and taking profits from what had been my most successful fund pick.
My fear is that the vast swathes of money piled into AI and tech will stop, or even unwind. There is no doubt that the big players are fantastic companies and that tech is going to be a driving force in the years to come. But after more than a decade of dominance, the continued enthusiasm could start to wane at some point.
For long-term investors, now may be the time to take some profits, allocating to less well-loved areas of the market. It may be an early decision – and I would certainly not sell out entirely – but the risk/reward seems skewed to the downside from here.