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Facebook reels but tech still reigns

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Summary

Status update: why we like technology despite Facebook’s woes

3 min read

Data breaches and tariff tantrums have shaken markets this week but in our view economic fundamentals are unchanged.

We take a look at one of this week’s big stories – the Facebook data row – and how it affects our long-term view of the tech sector.
 

FANGs but no FANGs

The Facebook data scandal is a harsh reminder that, while technology remains crucial to the economy and our daily lives, it comes with serious challenges. But in our view the sector still presents a long-term opportunity for investors.

As one of the so-called ‘FANGs’ alongside Amazon, Netflix and Google, Facebook is one of technology’s most influential stocks. But it’s worth remembering the sector’s real bite comes from more than just these four household names.

There are a myriad of growth drivers which should encourage investors including artificial intelligence, voice recognition and smart homes.

Technology is one of the best performing sectors in today’s markets. Global technology shares were up almost 37% in 2017, as measured by the MSCI World Tech Index, compared to a return of about 12% for the MSCI World. Despite the data row, they are still up 4.6% so far this year (as at 23 March 2018).

When Facebook’s stock fell, so did that of the other three FANGs and the wider sector. They all soon started rising again, but Amazon and Netflix recovered faster than their counterparts. This is arguably because those firms have different business models that don’t depend on using customer data for advertising purposes.

This shows that, while people fled the sector initially, its resilience and diversity soon brought them back.

Technology is one of our key investment themes. We have exposure through active fund managers seeking the best stocks and our direct equity Global 30 portfolio. Our tech funds have some exposure to the FANGs but are more focused on finding opportunities across the broader technology sector.

The four technology companies we hold in our Global 30 basket produce chips, components, software and tools that support the industry. In line with our investment principles of value and quality, these are profitable, cash-generating companies that are dominant players in industries with high barriers to entry. Over the last year they’ve generated a 42% return, which is above tech sector performance and well over the return from the general market.

 

“Technology is one of the best performing sectors in today’s markets.”

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Regulatory tales of the unexpected

One significant challenge for the technology sector is that regulation arguably can’t keep up with the pace of change and innovation. It can also neuter a firm’s business model in unexpected ways.

For example, as the Facebook data row highlights, some companies’ ability to capture and analyse customer data is vital to their growth prospects as it enables advertisers to target specific groups. But regulators are understandably concerned about privacy.

Another recent example is Uber, which was also forced to change how it operates when UK lawmakers deemed its drivers to be employees rather than self-employed. The company has agreed to renegotiate contracts but the resolution is likely to complicate what started as a simple business model.

Such clashes can create uncertainty, but over time the sector and its regulators should increasingly become aligned.
 

Backed by a strong economy

The tech sector is strongly linked to the US because that’s where most of the key players are based.

Last week’s Federal Reserve (Fed) rate announcement and comments from new chief Jerome Powell – in his debut outing – underscore the good health of the US economy.

Powell announced a 25 basis point rise, taking the Fed reference rate to 1.75% in a move widely anticipated by markets. The central bank highlighted a strong labour market and economic activity rising “at a moderate pace”. GDP forecasts were raised to 2.7% from 2.5% this year, and 2.4% from 2.1% next year.

The technology sector is historically less sensitive to interest rate movements than other sectors. Such changes present no real risk to the industry as long as the underlying economic conditions remain supportive. Higher inflation and a strong economic environment are good for equities generally and tech stocks should benefit.

Technology stays on our list of favoured themes thanks to its impressive growth, good earnings and vital role in shaping the future. While we constantly monitor its progress and are aware of the potential threats, it currently pushes all the right buttons for us.

 

Past performance should not be taken as a guide to future performance. The value of investments, and the income from them, can go down as well as up, and you may not recover the amount of your original investment.

About Coutts Investments

With unstinting focus on client objectives and capital preservation, Coutts Investments provide high-touch investment expertise that centres on diversified solutions and a service-led approach to portfolio management. Our investment process is as disciplined as it is creative – ensuring tailored solutions with robust results.

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