Will big tech shares lead a stock market bounceback Why technology funds have weathered the coronavirus storm better than most

As global markets continue to react violently to the uncertainty caused by the coronavirus pandemic, technology firms have weathered the storm reasonably well – so far.The technology sector has performed better than most other industries and regions over the past six weeks, which have seen key indices suffer their biggest drops in history.

Technology and telecoms funds were down 6.8 per cent on average over the six weeks to 7 April 2020, compared to UK funds which were down 20 per cent and global funds which were down 10.8 per cent

The recent resilience of technology stocks may come as something of a surprise.

Tech stocks are often considered risky: they typically have high valuations relative to earnings and operate in a highly competitive environment where a sudden success by one company can instantly take out a rival. 

Falling markets tend to see the share prices of companies with the highest valuations fall hard and fast.  

However, technology stock-focused funds have been among the best performing since markets really started becoming volatile at the end of February. 

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Technology is being used now more than ever as people are being asked to stay home and in many cases, work from home too. 

Companies in the software space have been particularly resilient, such as Microsoft which reported a record number of businesses and consumers using its remote communication tool Teams, while gaming, TV streaming and content delivery firms have also performed well.  

Meanwhile, Amazon has had to hire 100,000 extra workers in America to meet demand for deliveries.   

According to research platform FE fundinfo, technology and telecoms funds were down only 6.8 per cent on average over six weeks to 7 April, compared to UK funds which were down 20 per cent and global funds which were down 10.8 per cent. 

Over the past week, performance has remained level. 

The IA China/Greater China sector is one of the few to be outperforming the IA Tech & Telecomms sector, though its own tech names – including Alibaba and TenCent – will no doubt have had a part to play in that.

Fahad Hassan, fund manager at Atlantic House Investments, said: ‘The Chinese technology sector has done slightly better than other technology indices this year after significantly underperforming in 2019. 

‘The Trump administration’s tariffs on Chinese products and the pressure on US companies to find alternative suppliers impacted demand and multiples. 

‘While the demand environment has not improved, Chinese technology stocks appear to have stabilised. 

Companies in the software space have been resilient while stocks benefitting from the ‘stay at home’ environment in gaming, TV streaming and content delivery have also performed well

Who are the tech winners and losers? 

But which companies in particular have benefited from the dramatic changes being seen on a day-to-basis across the world?

‘Tech companies tend to sell high margin products which helps them to maintain high cash flows and low debt levels,’ said Hassan. 

‘While revenues and earnings can be cyclical, some companies have built predictable subscription-based business models that will be less impacted.’ 

For example, streaming websites such as YouTube, Netflix, and increasingly DIY video website TikTok have seen a huge rise in usage in recent weeks, likely because more people are at home finding new ways to keep busy and entertained. 

But two of the biggest winners to emerge from the crisis so far, according to Hyun Ho Sohn, manager of the Fidelity Global Technology fund, are Amazon and Microsoft, now valued at $2,016 and $166 per share respectively – both higher than their share prices at the start of 2020 (accurate at close 7 April 2020).

He said: ‘Amazon has been one of the clear winners from the crisis-driven stay at home trend, which should drive business momentum post-crisis. Both its e-commerce and cloud businesses still have long growth runways, generating cash after funding for growth.

‘Meanwhile Microsoft has been one of the prime beneficiaries of the recent flight to quality sentiment from investors – benefitting from relatively sticky revenue, and low production exposure to China in comparison with say, Apple. 

Shares for electric car manufacturer Tesla, owned by Elon Musk (pictured), are up 5 per cent since the start of the year (Accurate to 7 April 2020)

On a different note, William De Gale, manager of the BlueBox Global Technology fund, said Tesla has been a play on popular enthusiasm for environmentalism. 

The company, which manufactures electric vehicles saw a huge jump in its share price in the middle of February, and though this has since settled, it is still higher at $544 per share than its turn of the year figure of $460 per share. 

He said: ‘It did very well last year partly because the news flow was improving, but mainly, in my view, because investors were selling ‘dirty’ stocks such as oil and coal and needed something ‘green’ to invest in instead. 

‘Tesla was an obvious candidate and it’s not a particularly large stock so it had a huge boost to its valuation. 

‘Going forward I suspect we will see more of the same in terms of ESG concerns, as the crisis is making a lot of people think hard about what we have all been taking for granted, and looking after the planet is likely to rise even higher up the agenda.’

Meanwhile, Ho Sohn said Facebook and Alphabet have suffered slightly given a short-term slowdown in advertising markets with exposure to travel, but over the long term they are still positioned as winners in the internet space, ‘with balance sheet strength and increasingly different arms of their businesses to compensate for weakness in any one area, for example, increased engagement with YouTube’.

He continued: ‘Apple suffered disproportionately relative to other tech mega caps from the production shutdown in China at the start of the year, with weak quarterly results predicted for March, deteriorating further in June. 

‘The firm is also buying back shares, and has done well recently from the ‘flight to quality’ dynamic we’ve seen in the market.’

De Gale added: ‘Apple is probably quite challenged at present, first by disruption to its Chinese supply chain and demand suppression as China went into lockdown, and now by demand weakness in other markets in lockdown, as I suspect spending on luxury electronics is being cut as people worry about their finances and future. 

‘This could come back quite fast if governments manage to keep economies on life-support and then reflate them hard once restrictions are lifted – that might be enough to rebuild consumer confidence to the extent they start spending thousands on a new iPhone.’   

The value of technology 

While each firm is susceptible to its own individual circumstances, the current climate has shone a light on the value of technology. 

Robin Geffen of fund management house Liontrust said fundamental lifestyle changes taking place as a result of the coronavirus will lead to the ‘reappraisal of technology companies’ across the world.

Liontrust’s Geffen said lifestyle changes will lead to the ‘reappraisal of tech companies’

‘Around the world the technology sector has outperformed broader stockmarket indices since the coronavirus pandemic started hitting markets,’ he said. 

‘This is not a new trend, but the acceleration of the critical role that technology plays in disruption which we have been seeing and investing in for some time. 

‘This disruption is changing everything from the way we work, to the way we shop and spend our leisure time. 

‘Many of us are now working remotely from home and rely on Microsoft’s Azure or Amazon’s AWS service for cloud computing. 

‘We are shopping increasingly online using Amazon and food retailers like Sainsbury’s for deliveries, rather than going shopping. 

This also means we are increasingly using Visa and Mastercard credit and debit cards to pay for online purchases.’  

Geffen added many technology companies, such as Microsoft, Visa and Mastercard already pay dividends which makes them an attractive investment opportunity to both income and growth investors.

He added: ‘It is only a question of time before other technology giants like Amazon and Alphabet which generate enormous amounts of cash start paying dividends too. 

‘The world is changing faster now and it’s important that investors don’t miss out on these changes.’ 

What have tech managers been doing?

While many stocks have taken a battering since the start of the year, the impact on certain technology names has been minimal and since the sudden drop across markets around the middle of March, performance for these companies appears to be slowly but surely improving.

Hassan said he has used the recent sell-off to add to positions in long-term winners such as Adobe, Amazon and Microsoft while initiating new positions in the enablers of virtual interaction such as Akamai, Zscaler and Citrix.  

Ho Sohn also noted the sell-off has opened opportunities for bottom-up stock selection among certain mid and smaller cap names with ‘promising long-term fundamentals, which have been penalised heavily in contrast with large cap, higher-quality names’. 

He added: ‘High-multiple, high-growth Software as a Service names sold off heavily, and some now look attractive – benefitting as they do from recurring revenue and strategic assets that could make some of them buyout targets. 

‘I have also been adding to long-term internet winners given weaker recent stock price performance on the back of short-term weakness in advertising revenue, and trimming positions in gaming names which have done well recently. 

‘Within more cyclical areas, I see potential in certain memory semiconductor and semiconductor equipment businesses.’ 

Meanwhile Walter Price, manager of the Allianz Technology trust said he has sold shares in companies that rely on large deals or transactions and added to more gaming and ‘working from home’ stocks.  

What next for the tech sector? 

Atlantic House Investments’ Hassan said technology will create a more efficient world

As with any major event, markets, countries and sectors have adapted and it’s likely some changes will remain mainstream.

Price added: ‘I think technology companies will continue to have superior growth rates to most other sectors and the economic recovery will see new technology initiatives for better communications infrastructure and more resilient business and government response systems.’ 

Furthermore, Hassan said technology will allow us to achieve a more efficient, digital world and industry without the need for zero interest rates and fiscal hand-outs.

He said: ‘Before Covid-19, technology stocks were beginning to show large moves as investors sought higher returns from their equity allocations. 

Tesla, Uber and even Twitter had a great start to year as they delivered better than expected results. 

‘Clearly these turnarounds will need to be put on ice for now, however, the paradigm shift that each of these companies represents will not disappear in six months.’ 

Ho Sohn added: ‘I think companies that benefit from working from home dynamics and home entertainment and e-commerce have been given added long-term strength as investment ideas by our current circumstances.

‘I do not want to try to predict short-term investor moves, but remain confident in the long-term attractiveness of the global technology sector.’ 

Meanwhile, De Gale said over the longer term we will almost certainly see the move to remote working accelerate while medical spending is also likely to increase, pulling in more use of technology. 

He added: ‘Society was already thinking more about sustainability, and the crisis is only likely to reinforce this. 

‘So many of the environmental answers depend on technology implementation: smart agriculture, electric and autonomous vehicles, smart construction, fleet management, big-data analytics, and many more.’ How hard will investors be hit ,

Tech and coronavirus timeline 

Compiled by William De Gale, manager of the BlueBox Global Technology fund

Late January – Tech stocks saw an initial mild sell-off when the virus was seen by US investors as essentially a Chinese issue, so the worry was the disruption to global supply chains

Late February – Things started getting closer to home, with infections detected in Italy and Washington State, among other places, and tech sold off more sharply (the only time as of yet where tech indices performed worse than broader equity markets)

Early March – Tech started stabilising though there was clearly going to be disruption to western tech demand, but it might not be too bad

9 March – The market began to panic, plummeting on the realisation that most of the population of developed economies were going to be locked down for weeks on end, with potentially catastrophic impacts on the economy, and the US response seemed particularly chaotic and partisan

24 March – It became clear that the US Congress was going to reach a deal on an enormous stabilisation/stimulus package, putting a floor on the worst-case economic scenario, even if the medical outlook still looked awful. Tech had a very sharp recovery, along with other markets

Since then, technology has significantly outperformed broader equity markets. 

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