Tech companies have ‘nimble’ margins amid inflation, strategist says

ERShares COO Eva Ados joins Yahoo Finance Live to discuss tech and financial stock outlooks for 2022, pressures from Russian gas and wheat steering European economies towards a recession, inflation, and raised interest rates affecting wage growth.

Video Transcript

- Let's break all this down with Eva Ados. She is the ERShares COO. Eva, nice to have you with us. So let's talk about, in particular, the tech-heavy NASDAQ up 284 points at the moment. So you've got the Russian invasion of Ukraine, the Fed hikes, and hawkish talk from Fed Chair yesterday-- all these headwinds, yet the tech heavy NASDAQ surging. What's your reaction?

EVA ADOS: So we still like tech. And we think it's going to end the year much higher than where it's now. In fact, what we are doing is we're adding every week and we're planning to end the quarter with an overweight in tech. And that's because if you look at the S&P, as you said, it's only 6% off its high but the NASDAQ is way off.

We are looking at companies like Meta, which is 50% below its all-time high. This is unbelievable. And so what's unique about tech companies is that in an inflationary environment, they can still satisfy the investors because they're nimble, they're flexible, and they can stop chasing revenues if they choose to. So they can change the equation between their margins and the revenue growth.

And what we're expecting to see in the second quarter is we're going to see lower SG&A costs, lower marketing spends, lower revenue growth, but bigger margins. And that's going to satisfy investors.

- And as we take a deeper dive into some of those headwinds, mentioning Russia-Ukraine, you talked about how you foresee it lowering global GDP growth. How do you see that, then, affecting companies, in turn?

EVA ADOS: That's a great question. So it's the humanitarian crisis is of utmost importance. But when it comes to the global economy, there's going to be a spillover of the war, especially when it comes to Europe. So we are very concerned about Europe's economy and the likelihood it has to head into stagflation or a recessionary period.

And that's because they have increasing costs of food and energy, and a potential complete disruption of their energy system-- 45% of their gas comes from Russia. And now, we're adding into this slower growth, which was already slow heading into 2022, but now it's going to be even slower from the spillover effects.

When you remove one of the key partners of Europe, Russia, and they're going to see their GDP dropped by double-digits, that's a mathematical certainty that it's going to affect Europe's output too. And you add on top of this the refugee issue. And what's interesting is their wages, unlike here, they're not increasing. So that shows the sentiment and the implied fear of the consumer about a slowdown in their economy.

BRAD SMITH: With the impact that you're anticipating in Europe, how do you think that affects the forecast that we have yet to hear in the forthcoming earnings season from companies who have some type of EMEA division where they're going to be looking across Europe, Middle East, and Africa to really get a sense of where some of their future growth might be impacted in this near-term?

EVA ADOS: So the main issue, again, is energy and food associated with wheat and cereals from Ukraine. So every company that has any exposure to this or any trading activity with Russia or Ukraine is going to have a significantly worse outlook for the foreseeable future. And so this is something to look at.

But this, I think, is also creating winners. So China is now opportunistically positioned to benefit as a primary partner for Russia. Europe is going to have a tough time, unfortunately. And then you are looking at the US that is and will continue to be a safe haven for both trading activity and capital.

- So all the uncertainty in Western Europe could be a benefit for US companies. Is there any likelihood into 2023 of a recession in the United States?

EVA ADOS: We do not believe that. We think that inflation is here to stay and it's very important. But at the same time, we do not have runaway inflation, or hopefully we won't see that. We are still self-sufficient when it comes to both food and energy, which is key. And that's what Europe doesn't have.

And then we are also the main trading partner in the globe. So we will continue to see great growth. We'll have inflation. We saw the Fed becoming more aggressive, which is also a good thing. And I think the US will be good positioned for the foreseeable future. And in fact, between the global markets, when you compare the different economies, it's the best place to have your money right now, especially when it comes to US equities.

- And so then on the flip side of this coin then, as this volatility persists, who do you see as the biggest losers in this? Where should people be, perhaps, rotating out of these sectors?

EVA ADOS: So, again, international is very tricky. There are still opportunities. So we invest also internationally, and we still have a small weight in Europe and China. But we're very, very picky of which companies to choose.

Now, when it comes to the US, fixed income we saw did well in the last couple of weeks. That was because there was a flight to quality. And then that's going to end, because as you see interest rates rise, and eventually inflation will win, then yields will come down.

So we're seeing a shift from short-term treasuries towards equities. And then in equities, we continue to like financials because of the inflationary environment. And again, we like tech and we think it's well positioned to end the year higher.

BRAD SMITH: In a rising rate environment, typically there is some type of play or strategy around financials. How do you evaluate that sector right now?

EVA ADOS: Financials are good because they can pass along a cost associated with the rate increases. But now, what's tricky there, again, is the labor costs. And so we saw many financials over the last month struggle with the increase in wages.

And so when these financials have a technology spin and they're using automation, even blockchain and other emerging technologies, to be more nimble and more flexible in an inflationary environment, these are good places to be-- for example, Signature Bank is an example of a bank that's a leader when it comes to technology. So again, looking into digital payments, digital wallets, and everything digital, that's not going to suffer that much from wage cost increases.

- We do appreciate getting all your insights this afternoon. Eva Ados, the ERShares COO, thank you for your time today.