Tech stocks: Still a field of themes
The technology sector will no doubt continue to face challenges as the world adjusts to the disruption it is causing. But the sheer potency and variety of its investment themes means we believe the outlook remains decidedly rosy.
Until recently, tech stocks were the darlings of investors, attracted by the growth prospects of a sector whose constituents are changing our lives in numerous and profound ways – from how we clothe ourselves to how we find love.
But over the course of 2018, some began to reconsider this view as hope over a more connected, more efficient future was gradually overshadowed by a growing sense of fear.
Concerns over a ‘techlash’, whereby consumers and policy makers questioned how certain tech companies are using the vast power they have accrued, emerged alongside worries about global trade tensions that could disrupt supply chains and increase costs.
And earlier this month, anxiety over the impact of a slowdown in China – a key source of demand – spiked following an unexpected warning from Apple on tepid sales in the world’s second largest economy (although investors were slightly more sanguine following the company's actual results this week).
The upshot was that after years of outperformance, tech stocks as a sector have lost ground versus the broader market, as demonstrated by the relative performance of the Nasdaq Composite versus the S&P 500.
Within the ETF team at LGIM, we remain optimistic about the long-term prospects for the sector, given its potential to improve people’s lives and the opportunities for massive efficiency gains by companies. For example, Chinese logistics group JD.com has recently unveiled a warehouse that can handle 200,000 orders a day – but employs just four people.
Yes, investors are right to fret about how new regulations might impact earnings – and of course to wonder about how the Trump administration’s trade war might play out. But the lasting nature of the investment themes that have helped to drive the sector’s long-term returns, in our view, underpins its rosy outlook.
Ransomware and warehouses
Cyber security, for instance, is a global megatrend that we expect only to grow in importance as more systems, data and people connect digitally – and unfortunately become more vulnerable. The rise in ransomware attacks of late has been a painful reminder of this fact for individuals, companies and governments.
Another theme is batteries, which are continuing to revolutionise the way we move around and store power. About 1.1 million battery and plug-in hybrid passenger cars were sold worldwide in 2017, a staggering increase of 57% on the previous year, according to Bloomberg New Energy Finance.
Yet another theme is ecommerce, and the logistics that control the flow of products from origin to user: one-click purchases, same-day deliveries and warehouse automation. The global e-commerce logistics market is projected to swell at a compound annual growth rate of 15.6% from 2016 to 2020, according to TI Insight, a research group.
Tech stocks will, of course, continue to face challenges over the short and medium term, as the world adjusts to the disruption it is causing and due to the macroeconomic environment.
But the sheer potency and variety of these investment themes means that over the long term, we believe the sector’s outlook remains as bright as the very screen on which you are probably reading this post.