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Technology stocks have had a great start to the year, touching record high levels after posting better than expected earnings. But BlackRock, the world's largest asset manager, sounded a word of caution: profit growth may not be sustainable.
Andrew Swan, BlackRock's head of Asian and global emerging markets equities, said Monday the asset manager has turned "underweight" on the IT sector. One of the concerns he cited was the increasing supply, which can be "damaging" for the sector going into the second half of 2017 and 2018.
He singled out companies in the memory and semiconductor spaces as the ones most vulnerable.
"In terms of the areas that we're underweight or cautious, that would be in IT, increasingly. What's interesting is over the last six months, we've seen very strong profit recovery in the sector of about 25 percent in terms of profit revisions, but the sector has actually gone up more than that. It's gone up close to 35 percent," Swan said at BlackRock's 2017 Asia Mid-Year Investment Outlook.
"There's a high probability we're going to see companies looking to scale capacity in general. And it's normally the supply side that becomes more damaging for the sector," he added.
Despite that, BlackRock still has holdings in tech companies such as Samsung Electronics, Tencent and Alibaba Group. But Swan said his team is also increasing investments in the "old economies sector" such as financials and energy.
Overall in Asia, the asset manager is optimistic on China, India and Indonesia in both equities and credit. Belinda Boa, CIO of emerging markets and fundamental active equity, said the reflationary story is very much alive in the region despite the recent pull back seen in many economic data.
China, for instance, posted uneven PMI readings for its services and manufacturing sectors, while India's growth decelerated in the first quarter.
"We believe that the implied (global) growth rate will be sustained. This reflation trend will continue to dominate as the main macro theme for markets. We think that both emerging markets and Europe will continue to look attractive going forward," said Boa, who is also head of active investments for Asia Pacific.
She added that political risks in Europe have diminished compared to the beginning of the year, but security risks surrounding North Korea remained.
In terms of the impact of external developments on Asia, BlackRock's head of Asian credit Neeraj Seth said guidance by the European Central Bank is a larger factor than the United Kingdom elections this Thursday.
"Overall, the election this Thursday is getting a lot closer than say a month ago when it was called, but I don't think the U.K. election results have any significant impact on our markets either way… The markets have started to insulate a lot of those. If anything, I'd say the more important event in the current week is going to be the ECB meeting and what we get out of it in terms of the forward guidance," he said.