11 August 2020
An exception to the trend
It appears that the damaging effects of COVID-19 aren’t being felt by all businesses equally. Amongst widespread talk of sectors (particularly travel, hospitality and brick-and-mortar retail) struggling to survive the pandemic, one industry is thriving.
Technology companies are booming – especially in the US, where many big tech companies have seen their share prices rise during lockdown and have reported strong earnings. In fact, the country’s Nasdaq stock index, which is laden with such companies, reached a record high four days straight last week.
Buoyed by the likes of Microsoft, Facebook and Amazon, tech stocks are soaring ahead. This may seem odd because the health of the ‘real’ economy is still licking its wounds inflicted by the pandemic, which took hold in March. Indeed, there are still high levels of global unemployment (as jobs data in the US showed on Friday), and the recovery across the world may be slower than people first hoped – for example, the Bank of England said on Thursday that the UK economy won’t bounce back to its pre-virus levels until the end of 2021.
So far, tech companies also seem to be well-insulated from the debate in Washington surrounding the next round of COVID-19 support. After talks fell apart last week, President Trump signed executive orders pushing certain measures through, including for a new jobless benefit that’s lower than before.
Anatole Kaletsky, Founder and Co-Chairman of Gavekal, an economics consultancy, notes:
“Investors are assuming that [technology] businesses are completely invulnerable to economic activity, like perpetual motion machines that can generate higher and higher profits regardless of what’s happening in the rest of the world.”
Should investors be worried?
But even though they’re flourishing now, tech companies aren’t completely immune from the economy around them. Their revenues still come from the people and businesses that make up the real world. For example, if lots of businesses run out of cash due to COVID-19 lockdown measures, then many of them will reduce their advertising spend with Facebook and Google.
So, should investors be worried about the gap between the health of the ‘real’ economy and the rising share prices of a narrow band of successful companies?
The disparity between the two is a cause for concern, says Kaletsky. However, he adds that the answer is not to avoid these companies completely while momentum drives their share prices higher and higher. Rather, responsible investors will maintain a well-balanced set of investments that isn’t heavily biased towards to any one business or sector.
Time ticks away for TikTok
One tech company that isn’t fairing so well is Chinese social media app, TikTok. Despite its unpreceded popularity among locked-down app users of all ages, Chinese stocks fell last week as Trump ordered new limits on American companies to stop them dealing with the app, and also the WeChat app.
The order says that the data collected by these companies would allow the Chinese Communist Party access to Americans’ personal information – and followed a similar move earlier this year against technology manufacturer Huawei, which also cited national security concerns.
This is the latest in a series of clashes between the US and China, as tension mounts between the two countries. Chinese stocks lowered on the news, with Tencent, the parent company of WeChat, seeing its share price sink on Friday and on Monday morning. Tech giant Microsoft is now in talks to buy TikTok’s US operations.
Trade talks set to resume
The US and China will resume talks on their trade deal later this month. How those talks play out will be one of several factors that will influence the direction of markets in the second half of this year. The upcoming US election is one such issue, argues Mark Dowding of BlueBay, which co-manages the Strategic Income fund for St. James’s Place.
US voters will go to the polls again on 3rd November, and the subject of China-US relations will be a big theme in the election. The pressures of such a battle might sway Donald Trump to act in a way that disrupts the trade talks between the US and China, says Dowding. He adds:
“Although the perceived wisdom is that the White House won’t want to risk detonating this deal and putting the stock market into a tailspin, there is a sense that Trump is becoming more erratic and desperate as the days pass.”
Regardless of the outcome of the US-China talks, investors will be mulling over the impact of either candidate proving successful. Technology stocks might also be as resilient to November’s election as they have been to COVID-19, but investors will pay close attention to the race, nonetheless.