One of the biggest questions in markets today is whether the winning streak for US tech companies can last.
Right now the tech sector is taking a breather with the Nasdaq 100, the global index of the largest tech companies, having lost some 5.7% in September. But even with that fall, and a slightly bigger one in March at the start of the pandemic, the index is up around 30% in 2020 so far. Please remember past performance is not a reliable indicator of future returns.
Can that run continue? Investors looking to history may conclude that it can - and then some. Analysis by UBS highlighted in the Financial Times today looks at previous stumbles for tech, and how the sector has recovered from each one. It shows that, in every year since 2015, the six months following a correction in the Nasdaq has brought gains that eclipse the fall. More than that, gains in each recovery are around twice the size of the fall which preceded it, with the average correction coming in at 11% and the average recovery at 20%.
If that piece of history is repeated - and of course it may not be - then tech prices would now continue to recover and hit new peaks in the first half of next year, the FT said.
The case for tech is well-rehearsed by now. Even before lockdown, the world was becoming rapidly more digital. The pandemic has only accelerated that trend and raised demand for goods and services which rely less on the real world.
What’s more, tech seems to have the ability to create its own momentum. One of its hallmarks has been its self-fulfilling nature - the more of our lives we live online, the more we need devices and services which work online, which then prompt us to live more of our lives online, and so on.
This is changing how we see some of the biggest tech names. Apple, for example, was once seen as primarily the manufacturer of luxury tech but by expanding its footprint into recurring subscriptions it is becoming more akin to a consumer staple company upon which its customers rely.
As always with investing, however, there is an alternative view. Even if the biggest tech names look unassailable in their respective fields, it is still possible for all that future growth to be priced in, leaving little upside for those investing now. Anyone buying tech is doing so at valuations that are extremely high. And there may be dark clouds on the horizon in the form of heightened scrutiny of the largest tech names and their dominant positions.
Five year performance
As at 2 Oct
Past performance is not a reliable indicator of future returns
Source: FE, total returns as at 2.10.20, in GBP terms
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.