Should I buy more technology stocks?

THE strong rally among some of America’s big technology companies this year may have surprised some, especially in an environment of raised interest rates and high inflation. Both conditions reduce the allure of companies with the bulk of their expected big profits far out into the future.

However, an unpalatable growth picture for the economy as a whole has investors seeking out businesses with at least the theoretical potential of continuing their expansions. History has shown that some companies can indeed sustain growth through a wide range of economic conditions, due to their abilities to create and grow new markets.

Apple, perhaps, is the greatest exponent of this. Where once a telephone was a utility, indistinguishable from all others in any meaningful way, the continuing allure of handsets bearing fruit cements the existence of a lifestyle object.

Apple – which reports quarterly earnings next week – has started the year strongly. New York’s FANG+ Index – which tracks highly traded tech stocks such as Alphabet (Google), Amazon, Meta and Netflix as well as Apple – is about 36% up so far this year¹. Please remember past performance is not a reliable indicator of future results.

That has turned a heavy one-year loss for this select band of companies into a 14% gain. It’s almost as if the post pandemic hangover for tech companies, which came about as these businesses struggled to keep us all online all the time after lockdown – never happened.

It did, of course. However, those who continued to invest in tech funds during the ravages of 2022 – and the figures show quite a few of Fidelity’s personal investors did – will no doubt be feeling a bit more comfortable about their defiance in the face of danger.

Tech certainly still has snazzy growth on its side. In a world that is still globalised in most respects, it’s easy for us to appreciate the explosive expansion that could come from rolling out artificial intelligence, robotics, cloud computing, decarbonisation and autonomous vehicles to six or seven billion people. 

Artificial intelligence has moved closer to centre stage this earnings season. Investors expecting AI to produce a step change in tech profits in the foreseeable future have plenty to focus on. Meta’s metaverse, Microsoft’s investment in ChatGPT and Google’s experimental conversational AI service might be just the beginnings of a whole new tech revolution.

In the meantime, moderately more mundane questions about iPhone sales, Facebook’s user base or growth in Microsoft’s cloud business are likely to remain turnkeys to market sentiment.

Whether it was down to reduced expectations on Wall Street or genuine light at the end of the tunnel, big tech didn’t disappoint this past week.

Alphabet (Google) and Microsoft set the pace with quarterly results that comfortably beat expectations. Microsoft added around $150 billion to its value in one day after reporting strong earnings and sales, including of its AI products. Alphabet’s better-than-expected results were accompanied by a $70 billion share buyback plan².

Meta continued in the same vein, with a report confirming its Facebook monthly active users have finally reached 3 billion. The company’s CEO Mark Zukerberg also confirmed the company’s AI work is driving good results across its apps and business as a whole³.

This doesn’t mean to say the road ahead is clear. Interest rates have yet to show any real signs of coming down and recessionary fears could well continue to dog markets through the summer. Moreover, energy-light tech companies are receiving less of a lift from falling energy prices than many other sectors.

The recent rally among tech stocks has displaced valuations from the relatively cheap territory they briefly occupied towards the end of last year. The Bloomberg World Technology Index now trades on 27 times historic earnings, compared with 20 times for America’s broad-based S&P 500 Index. To invest in the FANG+ stocks you have to pay 40 times historic earnings⁴.

However, uncertain market environments usually create opportunities for investors to build positions at prices that turn out to have been attractive with the benefit of hindsight and, in this respect, the tech sector is no different. Who’s to say today’s valuations aren’t justified if tech companies go on to grow their earnings at above-market rates for the next five years?

Scottish Mortgage investors will be hoping the latest round of good news will eventually rub off on their technology-heavy trust. So far this year, the trust remains firmly in the doldrums, its share price still on a downward slope and trading at a discount to net asset value of nearly 22%⁵.

That now seems a low price to pay for the expertise of a management team that was shooting the lights out as recently as in 2020 and 2021.

Still with large holdings in proven world leaders in their fields such as the Dutch chipmaker ASML, Moderna and Tesla – these three stocks alone accounting for nearly a quarter of the portfolio – there would seem to be potential for a turnaround once the malaise after a deeply disappointing 2022 starts to fade.

There are ways to hedge your bets with investment trusts like this. A powerful one is to commit to a regular savings plan. Volatile assets lend themselves to such schemes, because they automatically tend to increase the number of opportunities to buy more shares at low prices and fewer at high prices. Automation is the hallmark of regular saving, which avoids the pitfalls of trying to pre-empt short-term movements in markets and shares.

Another way is to consider investing in an actively managed fund with an exposure to technology in the context of a much wider portfolio. Not only does that lessen the chance of being too wedded to one sector when sentiment turns against it, it means you are invested in a fund that can dynamically adjust its tech exposure up or down as conditions change.

Fidelity’s Select 50 list contains several funds that offer investors significant stakes in the technology sector in the context of a wider global portfolio.

The Rathbone Global Opportunities Fund is a famous past proponent of large tech companies that, since the pandemic, has taken on a more diversified exposure to world markets. The fund’s technology exposure has roughly halved, to around 14% as at the end of last month. However, star performer in 2023 Nvidia is the current top holding, with Microsoft in fifth place⁶.

Meanwhile, the Fidelity Global Special Situations Fund retains a technology exposure close to its peer group benchmark, at around 21%. However, at the end of last month, the Fund’s largest equity exposures were to Microsoft (4.8%) and Google-owner Alphabet (2.6%).

Source:

¹ Bloomberg, 28.4.23
2 Reuters, 26.4.23
3 Meta and Reuters, 27.4.23
4 Bloomberg 28.4.23
5 Baillie Gifford, 27.4.23
6 Rathbones, 31.3.23

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Overseas investments will be affected by movements in currency exchange rates. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Select 50 is not a personal recommendation to buy or sell a fund. When you are thinking about investing in shares, it’s generally a good idea to consider holding them alongside other investments in a diversified portfolio of assets. The shares in the Scottish Mortgage investment trust are listed on the London Stock Exchange and their price is affected by supply and demand. The investment trust can gain additional exposure to the market, known as gearing, potentially increasing volatility. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.