A bright future for the outperforming sector

As the global epidemic kicked in earlier this year, businesses tried to adjust their strategies for what is to come. Distribution channels for businesses have become more tailor-made in order to cater for their clients’ needs through digital platforms. The ever growing demand for the services of tech-based companies spiked ever since the start of the global epidemic. As a result, technology and online giant stocks rallied since the beginning of the year. Many have compared this rally to the euphoria witnessed in technology stocks 20 years ago. I think there are stark differences between that rally and today’s.

The COVID-19 stock market rebound initiated towards the end of March and beginning of April, with tech stocks outpacing other sectors. Despite the rally, this is far from the returns achieved during the dot-com era levels of overvaluation of tech companies.

If we had to compare the sector performance over the past twelve months, an increase of 35% was registered in the S&P 500, which is a far cry from the 1999-2000 rally, which saw tech stocks increase by over 100%. A small group of tech giants namely – Microsoft, Google, Apple and Facebook contribute towards the greater share of the S&P 500. The same stocks during the dot-com bubble accounted to just 2% of the total cash flow, while now these account towards 22% of the total market cash flow.

Meanwhile, the tech- heavy Nasdaq composite, is nowhere near long term price trend which deviated by 280%, two decades ago. But during that same period, the triple digit gains were long gone in a nine month period, moreover both indices, were in negative territory.

The big tech stake holders beat the analyst’s estimates during this year’s Q2 earnings call, with some suggesting that the current upbeat trend is supported by the strong profit growth and strong company fundamentals, rather than the speculative excess that was seen during the tech bubble in 2000. Furthermore, the investors’ drive to cash-in on tech giants, gives optimism that such companies are best positioned to ride the coronavirus pandemic’s fallout.

In fact, some market strategists have stated that tech stocks, rather than being a growth play, are actually a defensive investment given their outpaced climb during times of uncertainty and complete reliance on internet services like cloud-computing and e-commerce.

A number of recent surveys concluded that the majority of investors believe that the US technology stocks are simply the safest sector in highly uncertainty times. The survey also concluded that technology stocks nowadays are different from the tech stocks of the dot-com bubble era, because their business models have an impact on our daily lives.

Many expect that technology stocks will be the winners in the near future and the long term, even despite the US-China tensions.

Tech war tensions reached its climax towards the end of May, when Donald Trump started to introduce sanctions on Chinese companies. In July, the same administration barred 11 new Chinese companies from purchasing American technology and products without a special license, saying the firms were complicit in human rights violations – amongst the effected companies we find Apple, Google and HP.

Most recently President Trump issued two executive orders set to begin in 45 days. These executive orders prohibit US residents from doing business with Chinese owned applications Tiktok and WeChat, with the former  being linked with an acquisition from Microsoft.

Despite the rising tensions between the two largest world economies, the effect on the markets has been negligible on the US market. The same cannot be said with Chinese tech equities as big tech groups fell after Washington unveiled sanctions targeting Bejing fuelling concerns over a potential broader decoupling of the mentioned economies. The growing concerns between both economies have seen Chinese tech companies being devalued in a matter of days, losing billions of dollars in market value.

Following the global outbreak the tech sector has benefitted from our new way of life that the coronavirus pandemic brought on. The way people live, work and consume is now totally dependent on technology companies. The tech sector has weathered past crises and found innovative ways to emerge stronger each time. Technology companies have paved the way on a variety of strategies other industries are now using to cope in this crisis. The global epidemic might well spark further creativity and innovation in the industry, paving the way towards a bright future in the industry.

Julian Mangion, B. Com ICWIM is an Investment Advisor at Jesmond Mizzi Financial Advisors Limited. This article does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA and is a Member of the Malta Stock Exchange and a member of the Atlas Group. The directors or related parties, including the company, and their clients are likely to have an interest in securities mentioned in this article. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 2122 4410, or email [email protected]