Tech stocks weren’t considered defensive investments in the past. But as the coronavirus crisis reinforces technology’s fundamental role in our lives, investors can find sources of risk reduction and growth potential in companies that have become digital utilities enabling global networks.
Global technology stocks have enjoyed a solid run in a tough year. The MSCI World Technology Index advanced by 10.3% this year through June 5, while the MSCI All Country World Index fell by 3.9%. Skeptics might attribute the sector’s performance mostly to giants like Facebook and Netflix. However, we believe industry trends and opportunities extend way beyond the famous FAANG stocks.
Mind the Gap: Technology Growth Outpaces the Market
Earnings have been resilient across the sector. Global tech stocks posted much stronger earnings and revenue growth than the broad market in the first quarter before the coronavirus crisis. And since the pandemic hit, that gap has widened.
Global tech companies are expected to deliver 2% revenue growth this year, similar to defensive sectors like healthcare and consumer staples, according to consensus estimates. Tech earnings are expected to advance by 3.9% this year, while most sectors may suffer double-digit declines. Even when we smooth out some of the dramatic hit from the pandemic, by looking at a compound annual growth rate from 2019 through 2021, the tech sector’s earnings and revenue growth is expected to exceed the pace of the rest of the market by 9.5% and 3.8% respectively (Display).
The Utility Benefit: Can’t Live Without It
What’s been supporting the sector in such a challenging environment? Much stems from tech’s new role as a utility—something consumers and businesses simply can’t live without. Many people switch on their smartphones first thing in the morning and shut them off just before going to sleep. Broadband, mobility, internet deliveries and streaming video are now essential services. These necessities have become even greater as the pandemic increased the need for remote shopping, learning and working.
For companies and other enterprises, technology is more indispensable than ever. Without a robust digital infrastructure, companies can’t operate efficiently in work-from-home mode and students won’t have access to online classes. Government and healthcare organizations rely on technology platforms to mass communicate time-sensitive information to the public. Employees and customers expect airtight cybersecurity. Invoicing and payment systems must function seamlessly in a world of remote business operations.