Technology features in almost every aspect of our daily lives, and prime examples of areas where technology has rapidly advanced over recent years includes cloud computing, e-commerce and electric vehicles. Advances in technology can bring exciting prospects for growth, and this is one of the key reasons why holding exposure to technology companies is an attractive proposition for growth-minded investors.
It is impossible to ignore the influence of technology stocks on the prospects for global markets. Tech companies make up 22% of the MSCI World Index, which is an index of the largest companies across 23 developed World markets. Apple and Microsoft are the two largest quoted companies in the World, as measured by market capitalisation, with a combined market valuation of $4.8 trillion USD. Also within the top 10 companies measured by market capitalisation are Alphabet (the parent company of Google), Nvidia, Tesla and Meta (formerly Facebook).
Too big to ignore?
Major global tech giants such as Apple, Microsoft and Amazon are now a feature of our everyday lives. Anyone holding an investment portfolio, or pension fund invested in Equities, is likely to hold these global giants, and any global index tracking fund will have significant exposure. Given the sheer size of the likes of Apple and Microsoft, the prospects for global stock markets are, therefore, closely linked to the performance of a handful of tech companies. One could, therefore, argue that these stocks are simply too big to ignore.
Investing in technology stocks can provide exciting prospects for growth, as they can often disrupt markets with innovation that changes the landscape. This is very different from more traditional industries, where growth can often be linked to wider performance of the economy.
Tech stocks have the potential for faster growth, as they tend to have higher margins on the products or services they offer. Valuations of tech companies can therefore be expensive compared to other sectors of the economy, as investors expect to see strong growth in the future. As a result, the valuations placed on high growth tech stocks often leave little room for disappointment.
There are examples of highly rated tech start-ups quoted on exchanges that are yet to make a profit, with the lofty valuation based on the hope of explosive future earnings growth, which may or may not occur. This is why some areas of the tech sector can carry much greater levels of investment risk than others. Technology stocks can also suffer from being in vogue briefly and then find progress much harder to maintain. A recent example of this is Peloton, the fitness equipment manufacturer, whose shares trade at a fraction of the price seen during 2020.
The prospects for technology
The Covid-19 pandemic led to a rapid take-up of tech, and the strong performance seen by leading tech names drove the wider market to recovery from the low point reached during the first pandemic lockdown.
2022 was, however, a period when markets’ focus shifted away from technology, and value stocks and companies whose fortunes benefit from interest rate hikes outperformed. One of the reasons for this is that tech companies often rely on borrowing to fuel their growth and as interest rates rise, it is more expensive for these companies to service their debt. As markets expect interest rates to peak later this year, and possibly fall during 2024, attention has shifted again to the tech sector, which has seen strong gains so far this year.
The need for diversification
Diversification is a key component of any successful investment strategy. Whilst it is easy to be attracted to the growth potential that technology offers, it is vital to remember that high growth investments tend to be volatile – in other words, they can amplify the ups and downs of investment markets over time.
Whilst many tech companies are priced based on explosive growth in the future, a good proportion of tech companies have gone through their rapid expansion phase, and now offer something for the value investor. This is why holding a spread of companies in a collective investment, such as a Unit Trust, can help reduce risk.
It is also important to balance exposure to technology with other sectors of the economy, such as financial stocks, energy, utilities and industrials. By allocating your portfolio across different sectors, you can look to reduce the risk of one sector underperforming, and therefore harming the portfolio value, as not all sectors move in the same direction or speed at the same time. Adding balance by investing in other asset classes, such as Bonds, Property and Cash can also further reduce risk, as their returns don’t tend to be linked to stock market returns.
It’s always best to speak to an independent financial adviser before taking any action to change an investment strategy. Our experienced advisers can evaluate an existing investment portfolio and provide expert advice on the best way to get exposure to the tech sector.
If you would like to discuss the above in more detail, please speak to one of our Financial Planners here.
The value of investments and the income they produce can fall as well as rise. You may get back less than you invested. Past performance is not a reliable indicator of future performance. Investing in stocks and shares should be regarded as a long term investment and should fit in with your overall attitude to risk and your financial circumstance.