Technology has now become an important part of our daily lives, it should be a part of your investment portfolio too.
The development of the first silicone transistor in 1954 led to the immense rise in computing capability of machines, this led to the adoption of electronic technology in almost every machine and electronic gadget we have today, for both civilian and military application.
The successful commercialisation of these technologies has generated enormous wealth for technology pioneers, as evidently, seven out of the 10 most valuable companies in the US today are technology related companies (Alphabet (Google’s parent), Apple, Amazon, Facebook, Microsoft, Alibaba, and Visa).
Not only that, technology supremacy has become a contentious issue between the two largest economies in the world as revealed in the trade skirmish between US and China.
The outperformance of the tech sector
The commercialisation of technology has created countless products and services, the widespread use of technology in our daily lives has benefitted the sector as seen by the strong outperformance of the sector against global equities.
The MSCI All Country World is an index which covers stock markets from across the world, and is widely used as the benchmark for global stock market performance, while MSCI World IT index consist of stocks of technology companies.
Moving forward, tech continues to be a promising sector, the upcoming launch of 5G network could potentially provide internet speed up to 100 times more than the current speed. This is expected to change the way we utilize technology and help usher in a wave of equipment, computer and gadget upgrading.
The recent coronavirus outbreak has also turned out to become a catalyst to the sector as the forced isolation drove people to the spend more time online, and tech companies are reporting a surge in online activities such as remote conferencing, online gaming, video watching, online shopping, online food and grocery delivery, online classroom, and others.
The forced adoption of these daily habits is expected to change consumption behavior long after the COVID-19 threat dissipates.
Covid-19 fears offer good entry point
Given the promising growth expectation, valuation of the tech sector has been typically high. However, the recent global equity sell down has brought the sector’s valuation down to reasonable levels.
A key valuation metric, the price to earnings ratio, which measures the price of the stock index against how much profit the companies are expected to earn, has gone down significantly from 24.5 times to 19.0 times, near to its’ five-year average of 18.8 times. The lower the ratio, the more attractive the valuation.
A core allocation is given to a country or sector that is considered important and deserves a dedicated allocation in the managed portfolio.
Due to the tech sector’s significant weight in the global equity market, a 10 per cent is allocated to the sector for FSMOne Conventional Managed Portfolio (Refer to Figure 3).
We believe this inclusion will help investors capture the above average growth offered by the tech industry in the long run.
Allocation to US high yield bonds
The Covid-19 global outbreak has not only triggered fears in the equity markets, it also led to significant disruptions in the lending and borrowing market (the credit market).
Fears of economic stagnation has caused companies and financial institutions to hoard cash, resulting in a sudden drop in funding available to borrowers. With the decline in funds available to lend out, borrowers are compelled to increase their borrowing rates to attract lenders.
In response to the credit distress, the Federal Reserve of the United States has moved aggressively to stabilise the credit market with monetary stimulus. The US congress has also passed stimulus packages amounting to several trillions of dollars to support the economy.
The chart shows the yields on US high yield bonds has reached levels close to the global financial crisis in 2008, the elevated yield presents a good opportunity for investors to earn better fixed income returns.
Given the attractive yields, FSMOne Conventional Managed Portfolio has allocated five per cent to US high yield bonds for the conservative, moderately conservative and balanced portfolios.