The technology sector has been a high-performing group, experiencing record gains in 2020 thus far.
With our new virtual reality accompanied by a surge in online activity, e-commerce and software development are seeing aggressive growth.
Consumer and business spending in these areas has beefed up tech stock price targets and increased shares, reaching new highs.
While the S&P 500 has struggled with a year-to-date daily total return of -0.32%, the tech-heavy Nasdaq has gained about 20% this year to date.
Experts are observing a lot of momentum in the tech sector.
“Public tech stocks have been doing tremendously well so far this year,” says Ben Narasin, venture partner at New Enterprise Associates in Menlo Park, California.
Narasin explains that increasing dependence on technology is a good predictor of even greater reliance on technology after the pandemic ends.
The public health crisis has created a model where there is no one who isn’t using technology to get their job done, Narasin says. “Technology has always enabled people and companies to be more productive but not everyone embraced it. Now they have no choice.”
The push for digitization has resulted in technology business growth and consumer adoption and retention. “Huge growth means big value increases for these companies and this acceleration has gotten people excited,” Narasin adds.
Here are the most important things to know about tech investing looking toward the second half of 2020:
— Think about how tech will be used in the future.
— Consider hedging your bets.
— Be prepared for “techlash” repercussions.
— Stay optimistic.
[SEE: Analyst Picks for 7 Top 5G Stocks to Buy.]
Think About How Tech Will Be Used in the Future
Any industry may be subject to obsolescence risk: having a process, technology or product become obsolete, reducing a company’s competitiveness in the marketplace. The ever-shifting nature of tech may heighten that risk.
Technological change will “blaze a trail of destruction across even the nontech sectors of investor portfolios since the next phase of the technology revolution will be in technology-using firms,” many of which are far removed from the formal tech sector, says Taimur Hyat, chief operating officer at PGIM, the investment management business of Prudential Financial in New York City.
With that in mind, he says it’s important to evaluate how technological changes may impact total portfolio holdings to understand which asset types, securities or sectors face a higher risk of obsolescence from disruptive technologies and where the opportunities lie.
“Investors don’t need to find the unicorn in this next phase of technology-driven disruption, because the opportunities arising from the current wave of change are not limited to Silicon Valley or the narrowly defined tech sector,” Hyat says. “In fact, the greatest risk of obsolescence and the greatest potential for disruption will be in sectors as diverse as real estate, energy and consumer goods.”
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Consider Hedging Your Bets
Market volatility may be a cue to pull focus and reevaluate tech positioning.
Strong, secular drivers have done well in a digitally-driven economy so far but it’s important to have a balance with high-growth technology companies to offset any risks.
Some experts recommend to hedge higher growth tech stocks with cyclically exposed stocks, “It’s prudent to balance out that opportunity with cyclical investments within in tech,” says Dave Smith, senior vice president at Bailard in Foster City, California.
Smith says his company is focused on the best-in-class companies with strong management teams with a history of strong execution.
“We think there will be opportunities for cyclicals in the near term on semiconductors, particularly focused in the 5G space,” Smith says.
Investors need to be comfortable with market changes. If you’re invested in highly volatile companies, you have to be able to ride out those periods, experts say.
Narasin says to trade only an amount you’re comfortable losing or having materially impacted.
“In general, many tech stocks are great long-term bets, but having a long-term investment win when you are forced to get out short-term due to liquidity issues doesn’t help,” he explains.
Narasin stresses that investors need to prepare to “navigate volatility in terms of not needing that cash” and be in a position to withstand volatility and be a long-term buyer.
“Buy stocks you can buy and hold for the long term and not worry about how it impacts your day to day, because if it does, it will force you to make decisions you don’t want to make,” Narasin says.
>Be Prepared for a ‘Techlash’
Tech is a major focal point for regulators and lawmakers, both in the U.S. and abroad. Recently, the U.S. put a firmer grip on the regulation of technology exports in efforts to prevent China and other international players from obtaining exclusive technology.
The most recent example: The possibility of the U.S. banning TikTok, a popular social media app among teens, due to scares of Chinese government interference.
Hyat says those events, along with geopolitical tensions between China and other G-8 countries over intellectual property and strategic technology, could elevate volatility among tech stocks.
“Investors should absolutely continue to brace for a techlash, as regulators and governments aren’t yet done with tightening regulation around tech firms that have, historically, taken advantage quite aggressively of limited rules in a bid to win customers, reduce tax burdens and outmaneuver governments,” he says. “It remains to be seen how much appetite technology-driven firms have to self-regulate versus waiting for regulators to impose new regulations.”
While privacy and security are central to regulatory concerns, big tech’s adherence to antitrust laws is increasingly being called into question. David Russell, vice president of market intelligence at trading platform TradeStation in Chicago, says focusing on business-to-business stocks, rather than high-profile consumer-facing tech names may help to mitigate any risk that increasing regulation could present.
Going back to basics with classic business-to-business growth stocks is also a way to downplay tech stock risk without abandoning the sector entirely, says Blake Oliver, director of marketing at Jirav in Los Angeles.
“It isn’t nearly as sexy as social media and consumer tech, but there are plenty of fast-growing companies building critical Software-as-a-Service products (SaaS) for businesses all the way from small to enterprise,” he says.
Those products, which range from accounting software and collaboration apps to marketing automation programs, are being quickly adopted at the back end of every business in America, Oliver says. “We’re in the middle of a generational shift from on-premises and desktop software to cloud-based SaaS, and it’s a huge opportunity for both businesses and investors.”
[SEE: The S&P 500’s 10 Best Dividend Stocks in the First Half of 2020.]
The overarching theme for tech investors in the months ahead: Keep an eye open for new trends.
“There are companies benefiting from real secular trends that are accelerating right now,” says Blair Silverberg, co-founder and CEO of Capital in New York City.
Shopify and Livongo are great public market examples, Silverberg says. “Their business models fundamentally facilitate the shift toward conducting more life and work online.”
In terms of choosing new tech investments, “individual investors should take their cues from the institutional buyers who control the market,” TradeStation’s Russell says. “They may want to seek out companies that are making new highs or leading their peers.”
He offers a reminder that Apple (ticker: AAPL), Amazon ( AMZN), Netflix ( NFLX) and Facebook ( FB) outperformed for a long time and won’t be the last tech companies to do so.
“The next innovators will behave similarly,” Russell says. “Traders may want to wait for the new champions to emerge and then follow their momentum.”
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