Cash & Investment Management

Technology Sector Focus – Q1 2017

Monday 3rd April 2017

Tech stocks fell into a questionable spot after Donald Trump’s win. This is because Trump was expected to take stricter steps on immigration and outsourcing, the two pillars that the tech sector stands on. However, the Nasdaq Composite has given a decent return in the Trump rally, although it did lag the Dow Jones and S&P 500 in 2016. However, the technology index has gained greater momentum from the beginning of 2017 to surpass the S&P 500 and the Dow. Year to date the Nasdaq has gained +9.87%, Dow Jones +4.89% and the S&P 500 +5.77%.

The Trump administration’s tone has turned softer lately, on several key protectionist issues. Analysts do not expect too many threats on the outsourcing and the tech sector as a whole. Investors should note that the earnings picture of the technology sector has been reassuring lately. Expected earnings growth for the technology sector for Q1 of 2017 is 10.5% on 6.6% higher revenues, as per the Earnings Trends published on March 10th. The earnings growth rate is the highest among the other industries. Revenue growth expectation is also decent. Valuation wise, the tech sector is on a better ground than broader market ETFs like S&P 500 (SPY) and Dow Jones (DIA). Nasdaq Composite Sector ETF (QQQ) and Technology Sector ETF (XLK) now have a positive weighted alpha of 23.30 each. On the other hand, SPY has a positive weighted alpha of 15.50 and DIA has it at 19.10. Since positive weighted alpha hints at more gains, one can see that tech-heavy ETFs have higher chances of a positive run than SPY and DIA.

The technology sector is said to be a cyclical one and performs well in a growing economy. Recent data points give clues of economic wellbeing. An influence of this uptick in the economy on the stock market was only natural. So, if stocks continue to do well, a wealth effect can be realised and tech stocks may prosper out of this cyclicality. If stocks retreat, then valuation and better fundamentals would fuel tech stocks.

Technology giant Apple has regained its momentum and hit all-time highs this year after some struggles last year. A blockbuster fiscal first-quarter earnings report and the excitement surrounding the upcoming iPhone 8 made this possible. This also testifies to the strength in consumer demand related to tech products. Also, Apple has a solid exposure to many tech ETFs.

The sector saw strong demand for its products in emerging technology applications like tablets and smartphones, wearables, VR headsets and drones. Also, rise of cloud computing, big data and Internet of Things are there to give a big push to the sector. Moreover, the sector, especially the semiconductor area, is now concentrating on consolidation, something that investors follow closely.

Theresa May recently described the technology industry as a great British success story after a report revealed that investment in the sector spread across the country. Reaching out beyond London, 75% of venture capital and private equity investment went to regional businesses in 2016, amounting to €9.2 billion. The report revealed that the UK leads the way in Europe, attracting €28 billion in technology investment since 2011, compared with €11 billion in France and €9.3 billion in Germany. With talent and investment pouring into the sector, it has now grown to become a very significant contributor to the UK economy. The digital economy, which is growing at twice the rate of the wider economy, now contributes around €97 billion a year, an increase of 30% in five years.

Here are five technologies that are at the forefront right now

  • Artificial intelligence: Software algorithms that are capable of performing tasks that normally require human intelligence, such as visual perception, speech recognition, decision-making, and language translation. AI is an “umbrella” concept that is made up of numerous subfields such as machine learning, which focuses on the development of programs that can teach themselves to learn, understand, reason, plan, and act when exposed to new data in the right quantities.
  • Drones: Air or water-based devices and vehicles, for example Unmanned Aerial Vehicles, that fly or move without an on-board human pilot. Drones can operate autonomously (via on-board computers) on a predefined flight plan or be controlled remotely.
  • Virtual reality: Computer-generated simulation of a three-dimensional image or a complete environment, within a defined and contained space, that viewers can interact with in realistic ways. VR is intended to be an immersive experience and typically requires equipment, most commonly a helmet/headset.
  • 3D printing: Additive manufacturing techniques used to create three-dimensional objects based on digital models by layering or “printing” successive layers of materials. 3D printing relies on innovative “inks” including plastic, metal, and more recently, glass and wood.
  • Internet of Things: Network of objects embedded with sensors, software, network. connectivity, and compute capability, that can collect and exchange data over the Internet. Internet of Things enables devices to be connected and remotely monitored or controlled. The term Internet of Things has come to represent any device that is now “connected” and accessible via a network connection. The Industrial Internet of Things is a subset of Internet of Things and refers to its use in manufacturing and industrial sectors.