Monday, April 9, 2018

Our Present View of the Tech Sector

Thought I'd share with you our updated internal narrative on the technology sector. In addition to summarizing our assessment of the tech space, it offers some insight into the dynamics presently pushing stock prices in both directions:
Tech has some things working against it: One being the dramatic rise in protectionist threats between the U.S. and China. U.S. tech earnings are hugely dependent on foreign markets, any threats of retaliation on the part of China have met with big selloffs. A related potential headwind being the impact of a stronger dollar going forward, as the fundamental setup for the dollar, relative to the euro in particular, is markedly bullish. However, ongoing uncertainty stemming from public policy is a significant dollar headwind.
Also, tech now occupies its highest SP500 weighting since 2000; in a risk off scenario where investors are selling SP500-derived vehicles, tech would take an outsized hit relative to other sectors.
Also, at 18 times forward earnings – while not a scary p/e in my view – tech trades at a premium to the S&P (16.9).
Lastly, tech is clearly the winner since the beginning of 2017 (up 34% last year), therefore, investors looking to take profits in a risk off environment have the most to take from tech; that’s precisely what’s played out of late.
On a positive note: Capex is picking up pretty much across the world. As companies look to expand, technology will of course be an important aspect of their quest for greater productivity. Also, later this year and beyond, the realities of what 5G brings to the world will begin to become evident. This has bullish implications for tech for sure, but the efficiencies gained could be huge for many other sectors as well. 5G could be what brings telecom out of the doldrums in a big way, as AT&T and VZ, etc. will be huge players in the space.
The global economy, while presently easing in terms of rate of growth, is clearly improving: Many emerging markets are coming into their own and are aggressively reaching out and doing deals across borders. Their thirst for technology will be virtually unquenchable for years to come.
In summary, while 2018 looks iffy (on a relative basis) to me for tech, the prospects beyond are huge. The great risk for the moment is that the U.S. (the largest economy in the world) limits its contribution by pulling in, thus slowing the process and, sadly, diminishing its influence on the world stage. Which of course has serious long-term implications when it comes to the dollar; not the least of which being the government’s ability to fund its future ambitions at affordable rates.
In the very short-term, given that tech has taken the biggest hit during the recent selloff (and its bullish longer-term prospects remain intact) we look for it to potentially see the biggest rebounds among sectors on the big up days…
The following is from last week’s narrative (we have seen some “near-term technical improvement” since I wrote last week’s notes):
The recent attack on Amazon by the President and the security woes at Facebook are only exacerbating what has been the sector’s worst among sectors performance of late.All that said, if the Administration can successfully pivot away from present direction on trade (before enacting the latest threat), the prospects for tech from a global development standpoint remain exceedingly bullish for several years to come (think 5g, global growth, etc.)
Our present 13% - 15% tech target (range) for this year is presently on a short leash. Without some near-term technical improvement (and/or less headline and political risk), we may be cutting our weighting soon.

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