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The big tech trajectory for investors: US vs the world


A glance at a list of the 10 largest companies by market capitalisation tells you a lot about the state of the world in 2021.

 A conglomerate and a state-owned enterprise – two mainstays of twentieth century business – are hanging in there, in the shape of Berkshire Hathaway and Saudi Aramco. The remainder falls under the banner of US-listed tech. With a combined market capitalisation of $8.8 trillion (£6.6 trillion), four of the five top spots are occupied by the west coast giants Apple, Microsoft, Alphabet and Amazon.

In a way, every company in history has been a technology company. But what sets modern technology companies apart, however – both in their societal impact and from an investor perspective – is their unprecedented capacity for growth and innovation. Highlighting their US roots tells a story about American capitalism and business, but it also belies the firms’ huge global reach.

Where then, should investors start? Mike Seidenberg, portfolio manager at Allianz Technology Trust, suggests a place more familiar to investors in the pharmaceutical sector: pain.

“Where there’s pain, there’s opportunity in tech,” said Seidenberg, speaking this month at an Investors’ Chronicle webinar on technology investing. “That can be as simple as backing up storage, to making sure that an order on your iPhone is routed to the right McDonalds. It’s about identifying the operational challenge that a business or consumer might have, and then understanding how a company might solve that problem.”

For Kanishk Swarup, a partner at financial advisory firm Compound Wealth Planning, this problem-solving will increasingly lead to binary outcomes as digital transformation accelerates.

“There are certain sectors and companies that are going to become the next Facebooks, Googles and Amazons of the world, and equally there are going to be companies that disappear because they aren’t going to sustain themselves,” he argued. “Stock-picking is going to be of paramount importance, and it’s not going to be enough for investors to have a tracker.”

Equally, tech-led innovation could help spark cross-pollination between industries and help to marry tech to another huge and growing area of investor interest.

Makala Green, director at wealth manager Green Wealth Planning, points to the dovetailing of technology, infrastructure, and energy in efforts to green the economy. “You will see more tech companies integrate with cleaner living,” she forecasted. “You’re going to see [the sector] merge with the green-stamp economy.”

Where all this capital formation (and destruction) happens also matters. For UK investors, the dominance of international names in listed tech often means stepping out of the domestic market and getting familiar with the kind of company that is arguably atypical of the FTSE 100, where dividends are sometimes prioritised over innovation. Asked for their thoughts on why America has been such a successful incubator of technology companies, the panel identified a few trends.

“We get asked a lot of times, with respect to our fund, why so many companies are headquartered in the US,” acknowledged Seidenberg. “I think Silicon Valley had access to three things that were really important: good intellectual horsepower coming out of the universities, access to capital…and management talent that was able to build these businesses.” 

These businesses, as some market commentators often stress, have a habit of trading on what look like frothy multiples. Should investors be more concerned, particularly if interest rates rise?

“I feel there’s a lot of euphoria around interest rates going up, but we need to remember we are coming off a really low base,” said Swarup. “When interest rates were at 4 or 5 per cent, it was acceptable that the S&P should trade at 20 times PE multiple. But now we are 1.5 per cent on the US ten-year. Even if interest rates go up, from such a low base it is still less than half it used to be. We need to be open to the new paradigm we are in, which is of relatively very low interest rates.”

A decade-long run-up in multiples for technology stocks is often seen as a symptom of markets awash with liquidity, and a dearth of better alternatives in a low interest rate environment. But it may also reflect a greater risk appetite outside of Europe, according to Swarup.

“I find the acceptance of risk to be much higher in the US. People are ready to back board ideas, concepts and business models far more, and reward them with a better valuation and funding, as compared to Europe. That snowballs into something very powerful when it works.” 

One thing seems clear: bad memories about the dotcom crash have been replaced with bullishness about continued outperformance by technology firms well into the current decade. “It’s at the forefront of many people’s minds, and that’s just because tech is such a fast-paced growth industry,” said Green. “I don’t see that changing in the future.”

A big reason for these sustained hopes is something that will always matter to investors. For Swarup, “the companies that dominate the tech index are far more profit-making and far more cash-generating than they ever were before”.

Tech company assets are often classed as intangible, but the profits are real – and growing.

To hear more of the panel’s thoughts on technology, along with their sector and stock picks, you can watch back here until the end of December: