Technology has undoubtedly been a good investment in recent years, but in a climate of weaker growth, can it sustain its advantage?
- The strength of technology has come against a background of unprecedented economic expansion, benign inflation and supportive monetary policy
- Global economic growth is wobbling and technology has historically been seen as a cyclical sector
- Investors need to be cautious on price, but the increasing influence of technology cannot be ignored
The technology-heavy Nasdaq has risen 73% over the past five years, compared to 51% for the S&P 500, with stand-out performers such as Amazon seeing their share price jump by more than 4x. Even with the recent turbulence among technology stocks, it has been far better to be in than out.
However, this strength has come against a background of unprecedented economic expansion, benign inflation and supportive monetary policy. There has been little to impede the growth of key technology names. Looking forward, the sector would appear to face greater challenges: data privacy and security have become increasingly important issues; many key technology brands have lost their lustre. At the same time global economic growth is wobbling. Technology has historically been seen as a cyclical sector, liable to be blown about by the economic climate and as such, the future is less certain.
Certainly, some parts of the sector are still cyclical - semi-conductor demand, for example, ebbs and flows with economic growth. Individuals and companies tend to invest in technology when they have wealth and rein in spending when they don’t. However, increasingly technology is a necessary tool rather than a ‘nice to have’. For example, companies recognise that they need to harness artificial intelligence to remain competitive, but this is difficult to do if their data is still ‘on-premise’ rather than in the cloud. This is driving wider adoption of cloud-based systems, creating strong growth for those technology companies that provide it.
Companies no longer wait until they are flush with cash to do a big technology upgrade. Instead software-as-a-service allows them to flex their technology needs with their business in a more nuanced and flexible way. In areas such as healthcare, technology is helping provide better patient care. Turning back is not an option. This means that technology is less cyclical today than it has ever been.
Technology broadens its reach every year. It moves into new industries – from car manufacturers to financial services to healthcare – forcing profound and enduring change. As it does so, it creates new opportunities for investors.
Of course, this doesn’t always mean that technology is a great investment. The sector remains prone to over-exuberance on the part of investors, with many over-looking high valuations in pursuit of the next ‘hot’ thing. Even if a company is growing at 50% a year, if the market is expecting 100%, the price will fall, as has been seen in the most recent technology rout. However, the investment industry is often accused of looking backwards, being driven by benchmarks that reward yesterday’s winners. Technology investment forces investors to look forward, to try and determine which companies will be the leaders of tomorrow. This aligns it well with anyone investing for the longer-term.
