Technology has performed strongly in crisis. It may not in the next downturn
THE impact of the coronavirus pandemic is weighing heavily on the global economy with financial markets experiencing one of the swiftest downturns in history, leaving many worried about the future of their investments.
Markets have partially recovered, but it is clear damage has not been spread evenly and some sectors have experienced a stronger rally than others.
While the prices of shares in many UK companies have struggled to rise since the start of the outbreak, technology has been one of the best performing equity sectors over 2020, although past performance is not a guide to future performance.
Technology companies have been resilient because they have helped our socially-distanced world to function. Microsoft beat revenue expectations as businesses invested in technology so employees could stay at home. Sales in cloud computing platforms and collaboration software soared, offsetting a drop in the number of PCS sold.
Amazon is often considered a technology company because it uses insights from customer data to help manage its online retail business and is a global leader in cloud computing services.
It is expecting record revenues of $75-80 billion over the second quarter as bricks-and-mortar competitors shut up shop. The question is: are these higher revenues here to stay?
From grandparents video-calling grandchildren, to businesses making the most of remote working technology, society has experienced a crash-course in remote communication. Companies such as Amazon could hold on to a larger portion of the market share than it had previously because customers who do not normally shop online enjoy the convenience of home delivery.
The pandemic may also have accelerated changes we were already experiencing. Over the last decade, the number of companies allowing employees to work from home has increased, but not everyone was convinced. These last few months have proved many can effectively work from home, making the “home office” more socially and professionally acceptable than ever.
Fintech is flourishing in Scotland with a £22.5 million funding boost pledged in June to establish a Global Open Finance Centre of Excellence in Edinburgh. This research and development centre will help to develop the next generation of fintech solutions, boosting collaboration amongst Scotland’s technology sector.
A post-pandemic world throws up a lot of uncertainty and we can’t know for sure how, or even if, the world will be changed after this crisis.
A good example of this uncertainty can be illustrated by Amazon. While online sales have grown, so have operational costs.
Amazon has predicted it will spend the entirety of its second quarter operating income on coronavirus-related costs, including personal protective equipment for staff and additional cleaning for warehouses. This could mean an extra $45m per day in expenses and may result in a lower profit – even with higher revenues from increased sales.
It is possible governments will seek to increase taxes on technology companies
It is possible governments will seek to increase taxes on technology companies by changing how taxes are levied. This could be done by switching from taxing company profits, which can be moved offshore, to a broad tax on digital services.
The technology sector has been resilient during the pandemic, but this does not mean it will do well in the next market downturn. The circumstances around each are distinct, so the worst affected sectors may vary.
Though there is an opportunity for returns by investing in the technology sector, in the past technology stocks have been considered a riskier asset. The value of stocks can be more volatile than stocks from other sectors, so while prices can rise quickly, they can fall rapidly too.
Technology is a fast-moving sector, so companies can lose their competitive advantage by failing to anticipate customer needs.
Investing in technology companies can be done via an actively managed fund that uses the skills of investment professionals to select a range of top-performing companies.
However, a positive return is not guaranteed. It is important to hold a diversified range of investments across sectors, geographies and asset classes. So instead of investing in a technology fund, you can choose a fund that invests in multiple sectors and has significant holdings in technology companies.