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Past performance is no guarantee of future results.
Technology is by far the best performing stock market sector so far this year – something that many observers have attributed to a handful of megastars, namely Facebook, Apple, Amazon, Netflix and Google (FAANGs).
Share price performance, % change 2018 to date
Source: Thomson Reuters Datasteam. Data covering period 12.07.2017-01.08.2018
The bad news is that some of the FAANGs are finding the going tougher of late for a number of reasons, including increased scrutiny from regulators, lofty investor expectations and saturated markets.
The good news is that the tech universe’s remarkable performance is more broad-based than many realise; it includes numerous companies with strong earnings and attractive growth potential.
Indeed, although the big stars have certainly contributed to overall tech gains this year, the rest of the sector has also done very well. True, the S&P 500 Information Technology index1 – where Apple alone accounts for 15 per cent and the top 10 constituents make up nearly two-thirds of the market capitalisation – gained 12.8 per cent in the first eight months of 2018. But its equally weighted version – where every stock has the same degree of influence – is up 12.3 per cent. If only a few stocks were rallying, we would not see that.
EBIT, % growth year-on-year
* The S&P 500 IT index does not include Amazon or Netflix.
Source: Pictet Asset Management, Thomson Reuters Datasteam, Bloomberg. Data covering period 30.06.2011-30.06.2018
Source: Pictet Asset Management, Thomson Reuters Datastream, Bloomberg. Data covering period 22.01.2009-02.08.2018
One reason for tech’s success, we believe, is that – unlike many other sectors – it has buyers in both the consumer and corporate markets, meaning it captures a lot of the economic dividend.
Technology companies are able to apply extensive operational leverage: they can leverage intellectual property without the need to significantly expand its fixed costs, like staff or premises. The agility of such low fixed cost business models means tech companies are able to be nimble, and pivot to the fast changing competitive environment. This is critical in the era of disruption. While the biggest companies in a sector can become more encumbered by regulatory burdens and spend much of their time addressing their relationships with society or government, the rest are left to focus on innovation.
If economic growth continues, tech should continue to benefit. And while the FAANGs are likely to remain in the news, the evidence shows that the benefits to sector extend much farther than the headlines suggest.
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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.
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