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Tech stocks priced at premium: strategist

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The tech stock slide has put Apple and others in correction territory, but Fiduciary Trust International's Carin Pai tells Reuters' Fred Katayama why investors should still be cautious about buying them on the dips.

Video Transcript

FRED KATAYAMA: Stocks on Wall Street rallying Wednesday after Fed Chair Jerome Powell spoke before Congress yet again. Let's get a read from Carin Pai. She is Head of Equity Strategy at Fiduciary Trust International. Good afternoon and welcome back, Carin. Good to see you after all these months.

CARIN PAI: Good to see you, Fred.

FRED KATAYAMA: Well, Carin, what was it about what Chairman Powell said today that lifted investor sentiment? I mean, just yesterday he hinted that, you know, rate increases were far off into the future, and stocks sort of recovered. But was there something new in his message today?

CARIN PAI: Well, I think it's actually a reiteration of the commitment to keep rates low and to ensure that the economy is on a strong footing before contemplating rate increases. So I think the message is actually just a reaffirmation for investors that monetary policy will remain very supportive of credit and financial markets.

FRED KATAYAMA: Well, having heard that now for two days in a row then, does it mean that the cloud has been lifted from tech stocks? It's that fear, I guess, of rising yields, rising rates that really pressured them over the last week or so, few weeks.

CARIN PAI: Yes. So yes, recently some concerns about the potential pace of interest rate increases, or just a rise in the 10-year yield-- we've seen the 10-year yield rise to about 1.4%. And that has given some concern to market participants about whether inflationary pressures might lead the Fed to raise rates.

And that typically would be a little bit of a concern for what is considered long-duration assets like technology and high-growth stocks. And so I think it does give the market a little bit of a reprieve in terms of the tech sell-off or concern about high-growth stocks.

FRED KATAYAMA: So Carin, would that mean that it's a good time to dip in and buy tech stocks now? Or should you wait? Have the valuations come down enough to justify purchase?

CARIN PAI: It's a great question, Fred. So I think that-- we always think that there are some market opportunities. You know, we do have the ability to select individual stocks. I think overall in terms of the broader market and the aggregate, some caution probably still needs to-- some caution probably is still warranted here. Valuations for the markets, broadly speaking, are still on the higher side.

And you know, tech sector in particular, you know, the valuations on tech stocks-- while we believe that they offer the growth potential for investors and we like a lot of the secular themes in technology, like the whole digital transformation theme, tech stocks in general are trading a little bit higher relative to their historical range, at about a 30% premium to the market. So that does warrant some caution here. I think we really need to be very selective.

And the areas that we continue to like are things like payment processing. We do like companies that are-- you know, I think it's important to not buy entire sectors or entire industries, but really being selective and finding the high-quality companies where valuations are reasonable.

FRED KATAYAMA: So hold off just yet. But what about financials? I mean, with the so-called great rotation we've seen financials really take off. In fact, the S&P financial sector is hitting an all-time high today. And when you see stocks such as JPMorgan Chase or Goldman Sachs rise more than 50% in just six months, is it almost time to take profit on some of these financial names? Or do you just hold at this point?

CARIN PAI: So yes, there's been a pretty significant rotation in the market from growth into value-oriented sectors and names, as you mentioned. You know, I think that financial companies, as we've seen during this earnings season, have been using some of their reserves to help with their earnings. And they're well positioned in terms of a potential reflationary environment and a recovery in the broader economy.

So while they have seen a bump in performance, or a significant rally, we also have to kind of keep in mind that they've underperformed for a long period before that. And even last year, the sector was one of the underperformers for the market. So it's a big recovery, or a big number off of the trough levels. But we think that you probably want to hang on to some of these names that will continue to benefit upon a reopening and a recovery in the economy.

FRED KATAYAMA: Thanks a lot, Carin. Appreciate it. Our thanks to Carin Pai of Fiduciary Trust International. I'm Fred Katayama in New York. This is Reuters.