Wednesday, January 2, 2019

2018 Year-End Letter, Part 3: Sectors: Technology

I began making the case early in the year that tech is, generally, in a compromised place relative to the other cyclical sectors; industrials and materials in particular.

My thinking was that given that the sector had been largely spared in the tariff battle between the U.S. and China -- leading to notable out-performance for much of the year -- it, at best, would fall into fourth place once the two sides resolve their differences; as industrials and materials come bounding back from their tariff-induced depths, and financials catch a huge bid. Or, at worst, it goes plummeting into the abyss if indeed President Trump were to make good on his threat to throw the whole kitchen sink of Chinese imports into the tariff mix. 

Well, all I can say is ditto to the above, given where things stand today.

Again, not that tech won't perform in a no-tariff-war world, it's just not likely to lead the way.

One potential positive for the sector going forward is our view that the dollar will ultimately trend lower during 2019 (I'll explain our dollar thesis in the forthcoming U.S. dollar section of this letter): 

Given that, as a group, the tech sector conducts the majority of its business in foreign markets, a weaker dollar can be a real boost to bottom lines when those earnings are translated into USD terms. Not to mention how a cheaper dollar makes U.S. exports cheaper to foreign buyers.

Ironically, as I type, tech stocks are tanking in after-hours trading; on lowered revenue guidance from Apple that was largely blamed on a slowdown in its China business -- that it largely blamed on the U.S./China trade dispute. Although, I should add (speaking of the benefits of a weak dollar), CEO Tim Cook cited the stronger dollar as a headwind as well.

We're sticking with our 10% of equities target for now...

P.S. Looking further out: The advent of 5g wireless technology over the next few years is likely to be a huge, and bullish, game changer for the sector -- as well as for how the world conducts business in general. Much more on this topic to come...

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