The rotation into cyclical stocks isn't over, but investors should use volatility to 'build positions' in tech, UBS says

• Tech shares have been rising after a selloff pushed the Nasdaq into a technical correction on Monday.
• The tech gains won't stop the rotation into cyclicals that are exposed to the economic recovery, says UBS.
• Shares of tech disruptors remain attractive over the longer term, the investment bank said.

The bounce back in technology stocks does not spell the end of the market's rotation into cyclicals, says UBS, which suggested investors take advantage of volatility to add exposure to fintech and other tech-sector disruptors.

Technology stocks have been clawing back losses after recent selloffs dumped the Nasdaq Composite on Monday into a technical correction or a loss of more than 10% from its most recent high. A recent climb in some Treasury yields, notably the 10-year yield, in anticipation of higher inflation from economic recovery helped trigger the selloffs that hit some high-flying tech stocks hard.

Among high-profile names, Tesla, which suffered a year-to-date slide of 23% during the selloff, rose Thursday and was on track to reclaim the loss. Facebook has gained more than 6% after hitting its low of 2021 four sessions ago.

The improving performance of tech shares has also helped the S&P 500 rise nearly 5% after the broad-market gauge turned lower for the year.

The resurgence in tech stocks on Tuesday came at the cost of cyclicals, or stocks of companies poised to benefit from an economic recovery. But "we think the rotation into these stocks has further to run," said Mark Haefele, chief investment officer at UBS Global Wealth Management, in a note Thursday.

The rampup in COVID-19 vaccinations and anticipation of $1.9 trillion in stimulus aid has helped move some sectors of the market most sensitive to economic cycles higher this year. The S&P 500 Energy Sector has powered up about 40% in 2021 and the S&P 500 Financials Group has risen about 17%, bolstered by gains for bank stocks.

"[We] recommend tilting equity exposure in favor of stocks such as financials, industrials, and energy, which are also well positioned if yields continue to rise. We also like global small-caps," Haefele wrote.

The tech sector, despite its rally on Tuesday, is likely to remain volatile in the near term, especially against the backdrop of higher yields, he said. Still, tech sector disruptors including fintech, healthtech and greentech companies along with "5G beneficiaries" look attractive over the longer term, he said.

"Short-term volatility can be used to identify attractive entry points to add long-term secular growth exposure," he said, adding that investors "should make a plan to use market fluctuations to build positions."