Cryptocurrencies have dominated the financial headlines in the last few months, initially with jaw dropping gains followed more recently by rollercoaster trading. Jamie Dimon, CEO of JP Morgan and Warren Buffet have both cast their doubts about the longer term sustainability of Bitcoin, Ripple and others. In truth, cryptocurrencies have a long way to go before being considered a suitable investment for the average private client portfolio. Despite this, Bloomberg now reports on the price of Bitcoin alongside more established and recognised market exchanges like the Dow Jones and the NASDAQ. While Bitcoin and crypto currencies have hogged the news flow, the technology sector has been the engine room driving equity markets to new highs.
The sector, including both hardware and software companies, was the top performing sector in the FTSE World index in 2017. This strong performance continued from previous years with technology rarely out of the top three contributing sectors for the same index. For Irish investors, this performance was achieved despite the effect of the weakening of the US dollar versus the euro.
Market commentators Jim Cramer and Bob Lang christened the acronym FANG on CNBC’s Mad Money in February 2013. Their suggestion to viewers was: “Put money to work in companies that are totally dominant in their markets and put money to work in stocks that have serious momentum”. The FANG stocks consisted of four technology equities which have been the darlings of investors since; Facebook, Amazon, Netflix and Google (now Alphabet). Following this strategy rewarded investors handsomely.
When investors analyse technology firms as an investment, it is usually the American names which are the first to be considered. The FANG’s plus other household names here in Ireland, including Apple, Intel, Microsoft and Salesforce for example. All experienced impressive returns in 2017 in euro terms and this has continued in early 2018.
While conventional wisdom would say the majority of the largest IT companies are American, it is interesting to note that the US only accounted for 15 of top 25 tech companies in the Forbes list of the largest companies published in May 2017. Asian companies in particular have been making significant strides on the list since the turn of millennium. The continent was home to four companies breaking the US dominance within the top 15 – Cannon (No.15), Hon Hai Precision (no. 10), Samsung (no. 2) and Taiwan Semiconductor (No.12).
Spotting this trend back in September 2016, Cramer updated his acronym from FANG to FAAA. This consisted of updating Google’s rebranding to Alphabet, dropping Netflix and most interestingly adding a Chinese platform for global wholesale trade, Alibaba.
If asked to name a handful of Asian technology companies, it is likely an Irish person would offer up one or all of Alibaba, Lenovo or Samsung. While not as well known on this side of the world, companies like Tencent, a Chinese digital media and telecom conglomerate, SK Holdings, a South Korean conglomerate or Baidu, a Chinese company specializing in Internet-related services and products, have established themselves as some of the biggest players on the internet. Tencent in particular experienced a stellar 2017 in the equity market. It was not in the top 15 of the Forbes list in May 2017, but by November had become the first Asian business to be worth in excess of $500bn and in the process surpassed Facebook in market value.
However as Alibaba and Tencent are making waves in the developed world, their perceived dominance in China may not be as secure as expected. Another Chinese company JD.com has set its sights on topping Alibaba on various metrics. To achieve this goal, the company have been investing heavily in its supply chain while offering a higher end product within a more controlled market place. The company CEO, Liu Qiangdong, during an interview with CNBC in September 2017 claimed that his company will have surpassed Alibaba within the next 5 years. Another one to watch.
China in particular seems to have leapt ahead in its use of technology. Where many of us are becoming increasingly familiar with Apple Pay, usage in Ireland and Europe at large remains relatively low. However, Alibaba’s Alipay and Tencent’s TenPay appears considerably more widespread in China. The move away from holding cash in your wallet may be one of the first examples of emerging markets leading the developed world.
European names should not be excluded from this conversation. The region is home to leading companies like ASML, Infineon, Nokia and SAP, who are at the forefront of global developments involving driverless cars, iris-scanning technology and augmented reality to highlight a few themes.
Many fear as we close in on the 10th year of the current bull market that it can’t continue to propel itself forward. If the early indications of 2018 continue, it will be again the tech names to the fore. Most technology companies still see themselves in growth mode despite the large cash piles held on their balance sheet. Rather than paying a substantial dividend to shareholders, these companies believe they can reinvest these funds back into their businesses, generating a higher rate of return for their shareholder.
Author: Eoin McBennett, Investment Manager at Quilter Cheviot, https://www.quiltercheviot.com
Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.
Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.