'Technology is deflationary' and will make companies more efficient amid supply issues: Analyst

Brian Belski, BMO Capital Markets Chief Investment Strategist, discusses the technology sector's role in deflation amid ongoing supply chain issues.

Video transcript

ADAM SHAPIRO: There's this belief-- and it may not be accurate, as you point out in your most recent note to clients-- that when you see the 10-year yield rising, you're going to automatically get a sell-off in big tech. What are some of us missing if we follow that?

BRIAN BELSKI: Thanks for having us. And thanks for teeing that up. And of course, great to be on Yahoo and seeing yourself. You know, five of the last seven interest rate cycles were yields, and interest rates have gone up. Tech has actually outperformed. And that's kind of the mic drop conclusion to that analysis. And I think too many people throw tech into this high multiple camp. You know, from our perspective-- and we have the very good fortune of running nine equity portfolios, six in Canada and three in the United States and with a mixture of Canadian US stocks and Canada and all of US in America.

And when you look at tech stocks, Adam, they're kind of in four buckets, right? You have secular growth, structural growth, kind of the cyclical area, and then really the high flyers, these momentum type names that, of course, garnered a lot of the headlines, both in the beginning of the year, now at the end of the year again. When interest rates have gone up, these areas have been hit the most.

But I could make an argument and, quite frankly, that Apple's a value stock, or Microsoft could be a value stock in some circles. And it's that structural secular growth that we believe from a high quality basis continues to buoy the sector higher.

And so if you look at 1990, if you want to even go back further, 1990 to 2002, tech actually outperformed in a longer term rising rate environment, especially at the end, obviously, with the technology boom in the late '90s, when interest rates were going up. So I think it's a rush to judgment, quite frankly, that tech stocks in particular are weakening just because, or will weaken, because of the higher interest rates. And oh, by the way, tech stocks are outperforming this year, so that kind of debunks a lot of that.

SEANA SMITH: It certainly does. And Brian, it's good to see you again. Now that we are in the thick of earnings season, we got a lot of the results from the big banks last week. We're starting to hear from some of the big tech names this week. And of course, that's going to continue over the next couple of weeks. What do you think is the most important thing to be looking for or be listening to on these earnings calls this time around?

BRIAN BELSKI: Great question. Nice to see you as well, Seana. It's going to be about earnings discernibly and earnings consistency. What's really interesting is that over the last 10 years, and actually, more like 15 years, technology in the S&P 500 has become the most stable earner, meaning the standard deviation of earnings growth-- I don't mean to be too [? quanty ?] with you-- has dropped off considerably, meaning it's much more consistent.

And I think tech has proven that. You know, our case for tech over the next three to five years, it's one of our four favorite sectors, the other ones being financials, discretionary, and communication services. And who's making a five-year call anymore? Right now, officially, over the next 6 to 12 months, we're neutral because if you add up technology and communication services, it's 40% of the market. So you already have a generous portion of your portfolio in that.

But I think that technology is deflationary. I think it's going to continue to be deflationary. And it's going to cause all companies, not just the technology company, not just communication services company, but apparel makers, manufacturing companies, other discretionary areas, even more efficient. So the return structure of these companies in the United States, and Canada for that matter, in terms of return on assets, return on invested capital, return on equity, are really driven by this efficiency that's coming from technology.

ADAM SHAPIRO: I thought we had run out all the efficiency, starting in 1990 up until about 2001, that we were going to get from technology. Where do you see that, you know, coming down the pike to make us more efficient and drive down costs? You're the first person we've had use deflationary pressure. And I'm glad to hear it because I don't want to pay more money. But based on what?

BRIAN BELSKI: Everybody, write that down. I was the first one. No, Adam, that's a trap because, you know, the capacity led recession, OK, in 2000, 2001, was because of technology. We swamped-- we flooded the system with supply. Remember on December 31 of 1999, the lights were supposed to go off, and we had to have four computers and all these switches--

ADAM SHAPIRO: Y2K, who could forget it?

BRIAN BELSKI: Right? So but think about this. In the '70s and '80s, people-- you know, by the way, people talking about inflation in the '70s weren't even alive in the inflation-- or in the '70s. I was alive in the '70s, and I remember it. But think about this, OK? Technology is in every single thing. And in the '70s and '80s, Price Waterhouse, Arthur Andersen, McKinsey, went to these companies around the world and said, you need to offshore, right? You're going to offshore because units times price equals a bunch of widgets. If you went to business school, you know what the widget word is.

But I think what's happening-- and the supply issues is actually forcing the issue faster than anything. Number one, the supply chain things were changing well before the Trump tariffs. Number two, this whole notion of being dependent on someone else for the supply, all of our supply, is the bunk strategy. And I think the better strategy-- and companies are already starting to do it-- is this thing called onshoring or reshoring.

Big trend in terms of the infrastructure side, but more so on the technology side, Adam, because we're going to make the widgets 10 miles away because we can get it really fast to put it in this instrument. We don't need 100 widgets. We need 10 widgets. So it's either just in time or just in case type of inventory, but that's a really big structural change.

Now, it's-- we're not going to go exactly all in on this. It's going to take time to offshore or reshore. But at the end of the day, I think it's going to make companies that much more efficient and that much smarter in how they're managing their inventory.

SEANA SMITH: And Brian, real quick before we let you go, the one thing we haven't mentioned yet is a development, or lack of, I guess, down in DC, just in terms of what's going to happen to President Biden's economic agenda, how closely the market is tracking that, the latest developments there. I guess, what do you think the market is anticipating that we'll likely see over the coming weeks?

BRIAN BELSKI: I think the market's anticipating that they'll get some sort of a deal done to increase the debt ceiling and feel better about the package and things like that. We actually like it when we see consternation from Washington. That means nothing gets done. And at the end of the day, I think given the fact that we are inching toward the end of the year and 2022 is going to be a midterm election, Mr. Biden and the Democrats must be very aggressive to try to get some of these things through before we head into the 2022 kind of midterm. So time is of the essence.

ADAM SHAPIRO: Brian, always good to have you here. And as a child of the '70s, I got to ask you, Fleetwood Mac or Bruce Springsteen? Who was your favorite?

BRIAN BELSKI: Oh, Fleetwood Mac all day long. Fleetwood Mac all day long.

SEANA SMITH: Ugh, Bruce Springsteen. I'm not a child of the '70s, but I'll jump in, too.

ADAM SHAPIRO: Yeah, that's because I want to say you're in Jersey, but Seana is actually, I believe, just outside Philadelphia. Look, Bruce Belski, it is always a pleasure to get your insight. And we appreciate your joining us here from BMO.