Why has tech come out on top?

04 June 2020

5 minute read

The technology sector has been a resilient investment during the coronavirus pandemic. Here, we consider why the technology sector has performed well, and how you can invest into this sector.

Who's it for? All investors

The value of investments can fall as well as rise. You may get back less than you invest.

What you’ll learn:

  • Why technology companies have done well during the recent market sell off
  • What you could expect to see going forward
  • How you can invest in the technology sector with Smart Investor.

The impact of the coronavirus pandemic is still weighing heavily on the global economy. After countries across the world ordered lockdowns, financial markets experienced one of the swiftest downturns in history, leaving many worried about the future of their investments. Markets have partially recovered since then, but it’s clear that the damage hasn’t been spread evenly and some sectors have experienced a stronger rally than others.

While the prices of shares in many UK companies have struggled to rise since the start of the outbreak, technology has been one of the best performing equity sectors over 2020 although past performance is not a guide to future performance. But why has the technology sector been so resilient in this crisis? And what could we expect from technology investments going forward?

Solving problems in locked-down life 

One reason that technology companies have been resilient to this market downturn is because they have been able to help our socially-distanced world to function.

Microsoft beat revenue expectations as businesses invested in technology that meant office workers could stay safely at home. Their sales in cloud computing platforms and collaboration software soared, offsetting a drop in the number of PCs sold. Tencent, the world’s largest video game company, beat sales forecasts for the first quarter by almost $1bn as those stuck inside turned to their devices for entertainment.

Amazon is often considered a technology company because it uses insights from customer data to help manage its online retail business and is a global leader in cloud computing services. The company is expecting record revenues of $75-80bn over the second quarter as their bricks-and-mortar competitors shut up shop. There are many more examples we could use to demonstrate this trend – but are these higher revenues here to stay?

From grandparents video-calling grandchildren to businesses making the most of remote working technology, society has experienced a crash-course in remote communication, which may remain popular after lockdown is over. Companies like Amazon could hold on to a larger portion of the market share than it had before the coronavirus pandemic, as customers who don’t normally shop online enjoy the convenience of home delivery.

The pandemic may also be accelerating changes we were already experiencing. Over the last decade, the number of companies allowing employees to work from home has increased, but not everyone was convinced. These last few months have proved that many can effectively work from home, making the ‘home office’ more socially and professionally acceptable than ever. Now that the technology is in place so people can work remotely, will we need to return to the office?

A changed world?

However, it’s important to remember we can’t know for sure how, or even if, the world will be changed after this crisis. The future of the technology sector is still uncertain, just like the rest of our post-pandemic world.

A good example of this uncertainty can be found by looking a little closer at Amazon. While online sales have certainly grown, so have operational costs. Amazon have predicted that they will spend the entirety of their second quarter operating income on coronavirus related costs, such as personal protective equipment for staff and additional cleaning for their warehouses. In total, this could mean an extra $45m per day in expenses for Amazon. These costs may mean that Amazon has a lower profit – even with higher revenues from increased sales.

It is also possible that governments will seek to increase taxes on technology companies by changing how these taxes are levied. By switching from taxing company profits, which can be moved offshore, to a broad tax on digital services, it’s possible that governments will expect a bigger share of profits than we’ve seen before.

Also, it is important to remember that while the technology sector has been resilient during the coronavirus pandemic, this doesn’t mean it will do well in the next downturn in markets. The circumstances around each market downturn are distinct, so the sectors that are worst affected may vary each time.

How to invest in tech

If you’re interested in the technology sector, you can access technology companies through investing in an actively managed fund. You can benefit from the expertise of investment professionals, who use their skill to select a range of top-performing companies. However, a positive return is not guaranteed.

An example of a fund in this sector is The Polar Capital Technology Trust fund, which holds investments in a range of technology companies from across the world. The fund’s top holdings include Amazon, Microsoft and Tencent.

Though there is an opportunity for returns by investing in the technology sector, in the past technology stocks have been considered a riskier asset. The value of technology stocks can be more volatile than stocks from other sectors, so while prices can rise quickly, they can fall rapidly too. Technology is also a fast-moving sector, so companies can lose their competitive advantage by failing to anticipate what their customers want – like how Blackberry lost most of their market share in the smartphone industry to Apple.

Portfolios usually benefit from a diversified approach to investing. It is important to hold a diversified range of investments – across sectors, geographies and asset classes. Instead of investing in a technology fund, you can choose a fund that invests in multiple sectors and has significant holdings in technology companies. The Janus Henderson Global Sustainable Equity fund can be found on the Barclays Fund List, and the fund’s top ten holdings include Microsoft, Adobe and Nintendo.

Funds on the Barclays Fund List are selected by Barclays’ investment specialists and, based on our research, they’re the funds that we believe have the potential to generate consistent returns over the medium to long term.

Funds are designed for the long term so you should only consider them if you can stay invested for at least five years.

Bear in mind that our mentioning of these funds doesn’t constitute a recommendation. We don’t offer personal investment advice so if you’re not sure about investing, seek independent advice.

These are our current opinions but the future, as ever, is uncertain and outcomes may differ.

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