Thematic investing
Tech sector: same but different
November 2017
Technology stocks are booming again. But that doesn't mean that we are due a repeat of the dot-com bust.
Boom, bust... and boom again. Global technology stocks have surged over 40 per cent this year alone, and are now worth 56 per cent more than they were shortly before their infamous slump in 2000.[1]
Does that mean we are due another bust?
We don’t think so. Much as today’s technology – from partially autonomous vehicles to wifi-controlled fridges and washing machines or even robo-surgeons – looks very different from the tech available some 20 years ago, so do IT companies’ profit and loss accounts. Back then, the Internet sector’s net contribution to the overall operating income of MSCI World stocks was roughly zero. Today, it contributes between 6 and 7 per cent.[2]
That’s not the only favourable comparison with the bubble-era. Tech firms today are no longer valued solely on a per subscriber basis, but also on more traditional metrics such as revenues. At the same time, their subscribers are now bringing in vastly more money as billions of us use mobile devices.
Price-to-earnings ratios are a testament to this evolution. True, the global technology sector’s P/E multiple of 21 times is a little pricier than that of the overall market. But it is hardly in bubble territory, especially when compared with the ratio of 67 times seen before the dot-com bubble.[3]
tech sector leads on earnings growth
Earnings growth: MSCI World IT Index versus MSCI World Index, % since 1995
With the third quarter reporting season already underway, information technology companies are forecast to deliver 23.5 per cent year-on-year earnings growth – the second highest of any S and P 500 sector.[4]
The outlook for future profits also remains positive: justifiably, analysts continue to upgrade their tech forecasts.
And in another departure from the dizzy euphoria of the previous dot-com mania, cash has become king. In the US, all of the top five most cash-rich companies are in the technology sector, which in 2016 generated 48 per cent of total non-financial free cash flow.[5]
The dramatic improvement in the tech sector's standing reflects how quickly the world is progressing on the path to digitalisation. Already, some 3.7 billion of us are online and that is forecast to surge to 4.6 billion by 2021, covering more than half of the world’s population.[6] The AI market alone is forecast to grow to USD127 billion by 2025 from just USD2 billion in 2015.[7]
All this provides ample opportunities for well-positioned companies to grow and prosper.The art of picking the winners
That's not to say investors can be complacent. New technologies can take a long time to develop and commercialise, and there is a risk of investing too soon.
Quantum computing is one such example. In time, the technology promises to make computers faster and smarter by capitalising on the ability of subatomic particles to exist in more than one state at a time. However, we think we are unlikely to see a commercial quantum processor or computer for at least another five years – many early innovators may fall by the wayside before the technology becomes established.
Autonomous vehicles, on the other hand, are already partly a reality through the inclusion of various aspects of advanced driver assistance (ADAS) technologies in the latest car models. Fully driverless cars, lorries and buses, however, are still some years away from being developed – and then likely a few more years from becoming viable for the mass market.
Another concern is the rise of the tech pretender.
Today, virtually every company wants to be seen as keeping up with the tech revolution in some shape or form. The reality, however, is that only a relatively small number actually make a sizeable share of their money from latest innovations. Regulation is a red flag, too. The heavy dominance of the top tech players in the market increases the potential for more stringent regulations to foster competition and protect consumers.
Undoubtedly, the tech trade has become more crowded following hefty investment inflows into tech-related funds. But the opportunity pool is also growing, with emerging market companies increasingly joining the tech world. Indeed, tech is now the biggest sector in EM, accounting for 27.6 per cent of the MSCI Emerging Markets Index today from around 10 per cent a decade ago.[6]
So, as long as price appreciation goes hand-in-hand with higher earnings, then we believe tech is going in the right direction. Of course, there will be the inevitable bouts of profit taking or market corrections, such as the one seen in 2016. But for long-term investors who are willing and able to sit out any volatility, we believe the future is bright.
related articles
Important legal information
This marketing document is issued by Pictet Asset Management. It is neither directed to, nor intended for distribution or use by any person or entity who is a citizen or resident of, or domiciled or located in, any locality, state, country or jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation. Only the latest version of the fund’s prospectus, the KIID (Key Investor Information Document), regulations, annual and semi-annual reports may be relied upon as the basis for investment decisions. These documents are available on assetmanagement.pictet.
This document is used for informational purposes only and does not constitute, on Pictet Asset Management part, an offer to buy or sell solicitation or investment advice. It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date. The effective evolution of the economic variables and values of the financial markets could be significantly different from the indications communicated in this document.
Information, opinions and estimates contained in this document reflect a judgment at the original date of publication and are subject to change without notice. Pictet Asset Management has not taken any steps to ensure that the securities referred to in this document are suitable for any particular investor and this document is not to be relied upon in substitution for the exercise of independent judgment. Tax treatment depends on the individual circumstances of each investor and may be subject to change in the future. Before making any investment decision, investors are recommended to ascertain if this investment is suitable for them in light of their financial knowledge and experience, investment goals and financial situation, or to obtain specific advice from an industry professional.
The value and income of any of the securities or financial instruments mentioned in this document may fall as well as rise and, as a consequence, investors may receive back less than originally invested. Risk factors are listed in the fund’s prospectus and are not intended to be reproduced in full in this document.
Past performance is not a guarantee or a reliable indicator of future performance. Performance data does not include the commissions and fees charged at the time of subscribing for or redeeming shares. This marketing material is not intended to be a substitute for the fund’s full documentation or for any information which investors should obtain from their financial intermediaries acting in relation to their investment in the fund or funds mentioned in this document.
EU countries: the relevant entity is Pictet Asset Management (Europe) S.A., 15, avenue J. F. Kennedy, L-1855 Luxembourg
Switzerland: the relevant entity is Pictet Asset Management SA , 60 Route des Acacias – 1211 Geneva 73
Hong Kong: this material has not been reviewed by the Securities and Futures Commission or any other regulatory authority. The issuer of this material is Pictet Asset Management (Hong Kong) Limited.
Singapore: this material is issued by Pictet Asset Management (Singapore) Pte Ltd. This material is intended only for institutional and accredited investors and it has not been reviewed by the Monetary Authority of Singapore.
For Australian investors, Pictet Asset Management Limited (ARBN 121 228 957) is exempt from the requirement to hold an Australian financial services license, under the Corporations Act 2001.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
For US investors, Shares sold in the United States or to US Persons will only be sold in private placements to accredited investors pursuant to exemptions from SEC registration under the Section 4(2) and Regulation D private placement exemptions under the 1933 Act and qualified clients as defined under the 1940 Act. The Shares of the Pictet funds have not been registered under the 1933 Act and may not, except in transactions which do not violate United States securities laws, be directly or indirectly offered or sold in the United States or to any US Person. The Management Fund Companies of the Pictet Group will not be registered under the 1940 Act.
Pictet Asset Management Inc. (Pictet AM Inc) is responsible for effecting solicitation in North America to promote the portfolio management services of Pictet Asset Management Limited (Pictet AM Ltd) and Pictet Asset Management SA (Pictet AM SA).
In Canada Pictet AM Inc. is registered as Portfolio Manager authorised to conduct marketing activities on behalf of Pictet AM Ltd and Pictet AM SA. In the USA, Pictet AM Inc. is registered as an SEC Investment Adviser and its activities are conducted in full compliance with the SEC rules applicable to the marketing of affiliate entities as prescribed in the Adviser Act of 1940 ref. 17CFR275.206(4)-3.