Market Bulletin – Technology Revolutions – Monday 26th November 2018
Trouble for technology stocks dominated US markets this week, while growth and trade fears weighed on global markets. Meanwhile, both the UK and Italy proved that political debates with Brussels can all too easily distract from challenges on home soil.
Turbulence in the tech sector
Steam and railways powered the start of the nineteenth century and electricity, gas and oil opened up the twentieth; such shifts were mirrored on stock markets. And today, information technology stocks dominate the S&P 500, accounting for the five largest stocks and driving most of the market activity. Some have labelled this digital electronics takeover the ‘Third Industrial Revolution’.
However, this so-called revolution lost a few converts last week, after a phenomenal couple of years on markets. Early in the week, the FAANG (the acronym for the market’s five best-performing tech stocks: Facebook, Apple, Amazon, Netflix and Google) stocks took a hit – at one point being 20% down from their 2018 high-point. There are undoubtedly concerns about the pressures facing the tech industry, such as the apparent expiration of Moore’s Law (whereby computer chip capacity has been doubling every two years since the 1970s), growing regulation, trade tariffs and new taxes, plus a salvo of negative press.
However, it is worth remembering that online sales accounted for 10.2% of global retail sales last year, and this should rise to 13.7% next year. Advertising, of course, is following the money; 46.6% of households had a home computer last year, with a forecast to rise to 47.6% this year. In short, this revolution is not for turning.
Fear or reality?
But even the best trade markets can get overcrowded. And so the question is whether last week’s fall represented the triumph of fear, or of reality? The answer may depend on which individual stocks you hold. All the same, there may be signs of short-termism in the recent investor turn.
“The majority of our large technology related holdings, including Alphabet, Visa, Microsoft and Oracle, have not been impacted materially by the share market correction over the past few months, but a few have seen material recent price corrections, most notably Apple and Facebook,” said Hamish Douglass of Magellan Asset Management, Manager of the St. James’s Place International Equity fund and co-manager of the Global Growth fund. “Much of the share price reaction relates to short-term market sentiment rather than any change to the underlying economics or business outlook. We continue to have a high degree of conviction in the investment cases for each of these companies and believe each will deliver attractive returns over our investment horizon.”
A challenge for emerging technologies
One anxiety is White House policy. Last week, the Commerce Department launched a public consultation on “whether…certain emerging technologies are essential to the US” – and therefore need new export controls. For decades, these technologies originated from the public sector; even the iPhone’s most life-changing functions (including GPS, touchscreens, voice recognition) ultimately derive not from Silicon Valley but state-funded research. For today’s emerging technologies, that is no longer the case – and new export controls for technology companies may yet be the result.
Technology giants are already currying official favour to protect their market hold. Google is set to increase its vetting of adverts before the EU elections in May 2019, while Facebook has pledged tougher security and even funded journalism training. But opportunities in the sector are not limited to the biggest names.
David Levanson of Sands Capital, Co-manager of the St. James’s Place Global Equity and Global Growth funds, said: “In the software space, we hold Workday and Atlassian, which are category leaders in their respective markets. They have very attractive, defensible and visible business models. Their subscription models feature high percentages of recurring revenue, typically under multi-year contracts, and very high retention rates, which helps in the event of a downturn. We also believe many of the secular trends that should benefit our businesses remain intact.”
Markets are not only being stalled by these technology concerns, but by trade tensions, too. The Asia Pacific Economic Cooperation summit last week felt the effects of US-China tensions and a US decision to help Australia build a naval base in Papua – they failed to publish a communiqué for the first time since in 30 years. Expectations are therefore low for this week’s G20 in Argentina. Moreover, the price of a barrel of Brent crude oil slipped still further last week, falling below $60 and pushing down energy stocks
Adding to concern was the Organisation for Economic Co-operation and Development, who warned that global growth is already slowing: global export orders, industrial production, retail sales and container port traffic have all exhibited the same rapid deceleration in recent quarters. Such trends unnerve investors. The S&P 500 finished down for the week, with the Thanksgiving boost on markets being short-lived. But if trade tensions hurt the US, they may hurt China more. The Shanghai Composite index is now down more than 20% for the year – the S&P 500, on the other hand, is close to where it began.
Stocks in the UK have had a tough year in comparison to other markets, making last week’s dividends news all the more rewarding. Payouts reached a third quarter record of £32.3 billion, with year-on-year growth of 6.9% comfortably outstripping inflation. The smoother path of dividends provides a valuable counter to the recent spike in market volatility. The FTSE 100 struggled through the week but ended only marginally down. Prime Minister Theresa May’s success in agreeing a Brexit deal with the EU boosted sterling midweek. The EU formally signed up to the deal at the weekend – next stop: Westminster.
Both the UK and Italy are prime examples of how political debates with Brussels can distract from challenges on home soil. UK figures released last week show that the number of adults aged 85 or more who will need constant care is set to double to almost 446,000 in England over the next 20 years. The number of over-65s requiring constant care is set to reach a million in 2035. This places a major burden on state and family alike, underlining the imperative for early and comprehensive financial planning to cover potential costs. Here at Wellesley we can help with this, ensuring your peace of mind for the future.
While Italy’s population may be supportive of its expansionist budgetary plans, it is apparently more reluctant to risk buying up the debt. Nevertheless, some recent analysis suggests that Italy enjoys a “high fiscal multiplier”, meaning that even a modest increase in spending should have an accelerated effect on growth. This may work to placate an anxious EU.
Magellan and Sands Capital are fund managers for St. James’s Place.
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