Tech disruption will enable long-term sector gains

Thought of the day

by Chief Investment Office 21 Jun 2018

Technology is back in vogue. While the manufacturing-heavy Dow Jones Industrial Index fell for a seventh successive session on 20 June and has now erased this year’s gains, the Nasdaq Composite climbed 0.7% to a fresh all-time high.

While tech stocks are partly being supported by the perception that technology would be relatively less impacted by a trade war, we believe it is the positive outlook for the sector’s fundamentals, both short-term and longer-term, that is the real driver.

  • We expect global technology earnings growth of 17% for 2018, slightly above the roughly 15% pace for all market sectors. And tech is the largest sector globally, comprising 20% of the MSCI AC World Index and 26% of the US market.
  • The worries over tech that hurt stocks in March – notably the threat of tougher regulation and taxation due to concerns over data privacy and self-driving vehicles – appear to have faded. Short-term setbacks are to be expected, but we believe technological disruption is an irreversible trend.
  • We have identified five mainstream enabling technologies – artificial intelligence (AI), augmented reality/virtual reality (AR/VR), big data, cloud computing and 5G – that are set to transform many industries over the next decade. We expect them to grow in aggregate by an average 12.8% annually, from USD 420bn in 2017 to USD 1.1tn in 2025.

Much of the near-term good news has already been priced into the market, and we are neutral on the tech sector over a six-month horizon. Year-to-date total returns for the S&P 500 are 4.5%. For the IT sector they are 14.7% and for the Nasdaq 13.3%. Investors can take part in the long-term growth story by investing in a diversified way in our enabling technologies theme, in which leading software and semiconductor companies emerge as winners.

Read more about this topic in our research report, “Longer Term Investments: Enabling technologies

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