THESE past few weeks have seen a sharp pull back in stock markets, with those in the technology sector being most affected.
With incoming data on the world economy pointing towards a broadening recovery from the lows seen in the first half of this year, on the face of it, there doesn’t seem to be an obvious reason for this hit on the tech sector.
Alongside the technology sector’s impressive performance this year, keen observers have noted that there has been a sudden increase in Google searches for the term “tech bubble”.
In reality, it can be somewhat difficult to categorise the stock market winners of this year as “tech stocks”. There is a chasm-sized gap between the myriad of early-stage tech start-ups and the “titans of tech” now fondly known as FANGAM (Facebook, Apple, Netflix, Google, Amazon and Microsoft).
While those within this somewhat awkward acronym are the winners of both the past decade and indeed the year so far, they also face challenges ahead: regulatory action in the form of antitrust suits, focused on big tech companies’ use of their market power to engage in anti-competitive practices, have been launched in the US.
While Chinese companies such as Tencent, Alibaba, TikTok and Huawei are providing international competition, the heightened tensions between the US and China could have an impact, and we’ve already seen some moves in the US to sanction these brands.
The challenges to FANGAM are well known to investors and, as such, the market price should be expected to reflect a reasonable assessment of how these factors will evolve.
While the assumptions for future cash flow for these giants leave little room for error, their past few years’ performance has shown they can stay within the margins that investors are willing to overlook. This in turn fuels a slightly improved sense of stability for them, even when the road is bumpy.
In summary, some exposure to the global tech sector remains a good idea for long term investors. However, such exposure should be augmented with, or be part of, a broader mix of stocks, sectors, regions and asset classes that form a diversified portfolio. As ever, in achieving balance, the volatility and risk being taken to reach your objective can be reduced.
There may well be more weeks yet to come where we see markets decline and it might be tempting to knee-jerk, in an attempt to avert trouble. Trying to time the markets is fraught with its own difficulty and the investor’s focal point should be years (not days, weeks or months) in the future.
The question to be considered is: how do I beat inflation over that time frame? A diversified investment strategy can at times offer a rocky road (as this year stands testament to!) however it is the most sustainable route an individual has to access the fruits of continued human ingenuity and adaptability in the technology world. Interestingly, these characteristics are the forces that have proven to be the most powerful antidote to the corrosive powers of inflation.
We know from history that trying to win via cherry-picking your market entry based on potential future threats (US election, Brexit etc) is not a feasible plan - the best approach is to go for it and try to focus on the long term, sitting back and avoiding the temptation to check on your portfolio too often.
Cahir Gilheaney is a wealth manager with Barclays Wealth and Investments in Belfast.
