“We live in the digital age” is the mantra of two BBC comedians, Elis James and John Robins. Just like politicians supporting economic growth, embracing technology is the 21st century is not obvious – we are everything live in the digital age now. The rise of consumer technology has made life easier for buyers and reduced transaction costs for businesses. But it made the investment Stronger in some ways. During the boom, every stock wanted to be seen as technology. But if everything is digitally enabled, from precision missiles to our weekly grocery store, how can we see the wood in trees?
Fortunately, element classification is one of the great passions of the investment industry, as shown by the current rush to define what is ESG and what is not. As is the case in the field of sustainable development, there is some disagreement on the methodology, but for investors, knowing where the products belong is useful even if the objectives change over time. How can investors find tech stocks?
One classification system is the Industry Classification Benchmark (ICB) classification system, which divides companies into industry/supersector/sector and subsector. FTSE Russell, a subsidiary of the London Stock Exchange Group, runs the ICB. Another is MSCI’s Global Industry Classification Standard (GICS). Morningstar divides stocks into cyclical, defensive and sensitive super sectors, with 145 industries – and technology belongs to the sensitive sector. “Tech,” however, is a broad church, including IT service providers, software and hardware companies, cybersecurity firms, and more. In Morningstar Direct’s research portal, users can find 9,116 stocks listed in the UK – and more than 1,000 of these are classified as technology.
Want an easy shortcut? For many investors, the Nasdaq is synonymous with a decades-long tech boom. Like the LSE, it gives its name to an index, a Wall Street stock exchange and is a company in its own right. Launched in 1971 with a value of 100, the Nasdaq Composite had exceeded the 2,000 point mark at the beginning of 2010. In June 2020, the tech-dominated index took its first step above 10,000 points and reached an all-time high (so far) just above 16,000 points in November 2021. In 1999, the index rose the most in percentage terms, gaining 85%, and in 2020 – the year of lockdown – jumped 43%. No wonder investors are excited. The Nasdaq 100 is a more concentrated version.
The Nasdaq has become synonymous with American technology, but other industries are also included. All the household names are there, the biggest of which are Apple, Microsoft and Amazon. But non-tech companies like PepsiCo, Costco and Monster Energy are also making a difference. Savvy readers will notice that the top three bear a remarkable resemblance to the S&P 500, the benchmark. This reflects the dominance of tech mega-caps over the past decade and also reveals the difficulty passive investors face when seeking non-tech exposure. It also underscores another issue – that investors may struggle to find a weighting towards non-US tech. China is an example of a country that has partnered with tech companies like Alibaba and Tencent, but the volatility will put some off.
Morningstar’s Global Tech Index has 988 holdings, but again it’s hard to escape Apple, which has a weighting of almost 20%. US stocks make up 75% of this index.
As the tech bull run winds down after a decade or more of stunning gains and rallies in energy stocks, could we be seeing a shift in sentiment among professionals and retail investors? According to Morningstar’s Chief US Market Strategist, Dave Sekera, US energy stocks are now overvalued and the sector is now slightly undervalued.
IPOs across the world in recent years have been heavily marketed with a “tech” flavor and have attracted billions of dollars of investors. The disappointments of Uber (UBER) – still below its $45 IPO price – and Deliveroo (ROO) are just two examples of how tech buzz and reality are unhappy companions.
We could see a shift in focus among listed companies and the way they present themselves to the rest of the world. A quick glance at most websites reveals the words “digital” and “technology,” leading investors to wonder what the company actually does. Those words no longer have the power of attraction, which is partly due to the ubiquity of technology and investors’ desire to chase the “next big thing.” The short-term market is diverging, investors have short memories – and the lure of finding the next Apple or Amazon remains strong. Perhaps as the consumer tech revolution matures, investors will turn their attention elsewhere – but the tech will be at the box office for some time to come.