-
""

Are technology stocks a good Black Friday investment?

16 November 2020

6 minute read

Technology will help shoppers bag bargains online this Black Friday weekend. We look at whether this means you should stock up on technology investments too.

Who's it for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice. Past performance is not a reliable indicator of future performances.

What you’ll learn:

  • How worldwide lockdown living has given technology companies an extra boost in 2020.
  • The headwinds facing US tech giants that could dampen future profits.
  • Why diversification can be a good way to cash in on technology’s potential further growth while protecting you if things go in a different direction.

Every Black Friday – the day in late November the nation tends to kick start its pre-Christmas shopping splurge – we see images of shoppers carrying off armfuls of electrical and digital goods from department stores at bargain prices.   

This year, with more of us stuck at home making our purchases from laptops or hand held devices, is this a signal for investors to also be carrying off tech shares when the frenzy begins?

Technology shares have been the stock market darlings of the last few years, including most of 2020 to date, apart from a couple of wobbles when share prices fell as investors took profits.

The sector has not always been so loved, of course.  The tech bubble that burst in 2000 followed a surge in devotion for technology companies left investors feeling sore for years to follow.   

Though there is no guarantee that another risky bubble is not developing, the kinds of companies investors are buying are different this time round.  The late 1990s bubble was characterised by hype surrounding unproven start-ups that quickly went bust.  This time round the companies involved are well-established and among the most profitable in the world.

These companies have provided the engine of growth for the US stock market in particular – with American tech giants such as Facebook, Amazon, Netflix and Alphabet (owner of Google) – accounting for a quarter of the value of all the companies listed on the S&P 500 Index. They have also proved a lifebelt for many an investor’s portfolio during the coronavirus crisis.

Hao Ran Wee, Barclays Senior Investment Strategist, says: “The main tech companies outperformed when stock markets fell on the arrival of the pandemic.  They proved more resilient to the fallout when compared to airlines, retailers, real estate and energy.”

It’s no wonder. With work and entertainment increasingly based at home due to the virus we have stepped up our use of online searches via Google, mastered (in some cases) video calls over Zoom, binged on box sets via services such as Netflix and concentrated more of our shopping habits through the Amazon online retail goliath. 

We’ve witnessed a great leap forward in technology – and share prices

Data from management consultancy McKinsey suggests this surge in usage across so many elements of our lives meant the world had “vaulted five years forward in consumer and business digital adoption in a matter of around eight weeks”.

What this meant for investors, says Hao, is “the growth story for technology remained intact while that of other sectors fell apart”.

When markets as a whole began to regain lost ground over the months that followed the coronavirus-induced crash in March 2020, investors started to wonder whether technology could continue its upward trajectory.

Some investors decided to take profits while the going was good.

This response spooked the markets and caused the S&P 500 to tumble 3.5% in one day on 3 September, while the technology-dominated Nasdaq index fell 5%.

The scary moment passed, though there is no guarantee this kind of reaction won’t occur again. “It was a short breather” says Hao.

The case for technology continuing on an upward growth path is partly tied to the notion of whether people will continue their love affair with digital, whether it’s through buying designer handsets, investing in cloud computing or simply a preference for shopping online. There is certainly little sign of this tailing off yet.

Watch out for challenges facing technology giants

Nevertheless, there are challenges to keep a watchful eye on, not least for the US tech giants (the ones that dominate the American stock market). Politicians of all persuasions on the other side of the pond are calling for more regulatory intervention to prevent tech firms having too tight a grip on society – whether it’s through fears over their monopoly positions or the proliferation on social media of ‘fake news’.

Hao says: “Controls could dampen profits.”

In addition, experts wonder whether the tech giants can continue their current pace of growth. The resilience of technology shares during the pandemic doesn’t necessarily mean they can squeeze big returns in future. Hao says: “The high valuation of these companies means they are more vulnerable to investor disappointment, which could be seen in their inability to expand and therefore lead to lower growth.”

Hao adds: “It’s important to remember the dangers of extrapolating past performance in to the future.”

Netflix, for example, saw its share price perform strongly between January and September 2020. But when it posted lukewarm third quarter results in October 2020, largely due to a slowdown in its previously meteoric subscriber growth, this prompted an immediate share price tumble.

It is not possible to know whether technology as a sector has reached its limit of vigorous growth or if it still has capacity to expand at great leaps and bounds.

Diversify to avoid missing out on gains – and protect against losses

There are ways to position your investments so that you can get benefit from technology’s growth, should that continue, but protection if things take a different turn.

A popular approach is to put money into a diversified portfolio.

Diversification means making sure you’re not relying on one type of investment too heavily, whether that be technology or any other sector or asset. It means you won’t miss out when one sector or asset does well – nor should you hopefully lose too much if it does badly. The idea is a diversification strategy can help protect your investments and reduce the overall risk of losing money.

Hao says, “If the oil price – which did badly in the coronavirus market slump –were to shoot up in the future, energy companies would outperform. Would you want to miss out on that? With this approach you can have a portfolio with a combination of bargain companies that give you value as well as the quality companies that are priced higher.”

How funds provide instant diversification

Funds are a popular way to provide instant diversification. Funds spread investments on your behalf across a large number of companies, sectors, assets and even countries.

If you are looking for some inspiration, or want to add a particular technology fund to a portfolio of funds you already own as part of a strategy to diversify, then you could check out the Barclays Funds List. This is a selection of funds covering different sectors that Barclays’ investment specialists have chosen based on the managers’ solid reputations and robust investment processes and may include technology funds.

Adding holdings of global and US equity funds is another way to give you significant exposure to technology companies because they feature in many of these funds. Of course if you already hold global or American funds then you may decide you have sufficient technology in your portfolio.

You may also be interested in

The value of investments can fall as well as rise. You may get back less than you invest. Tax rules can change and their effects on you will depend on your individual circumstances.

Investment Account

A fully flexible way to invest

A flexible, straightforward account with no limits on the amount you can invest.

 ""

Investment ISA

An easy way to start investing

We offer two ways to invest using an Investment ISA (also known as a stocks and shares ISA). Choose your own investments with Smart Investor, or let us make the decisions for you with Plan & Invest. Either way, invest up to £20,000 per year and any returns you make are tax-free1.

Start investing to make the most of those special times to come by using your new 2021-22 ISA allowance in an Investment ISA today. The sooner you begin, the sooner you could grow your money, tax efficiently.

 ""

Plan & Invest

Our experts will manage your investments for you. We will develop a personalised Investment Plan tailored to you but our experts then make all the buy and sell decisions. Invest from £5,000 in cash and/or an ISA transfer2 today.