Tech Investing in Turmoil: Fluctuat Nec Mergitur!
About Tech Investing Series, Part I: Investment Outlook
The recent market turmoil has left investors wondering whether it's a sign of opportunity or a warning. Technology companies have dominated the investment landscape for much of the past decade, but the post-pandemic market has brought significant volatility, causing them to fall behind. Now, these companies are facing their first major test since the dot-com bubble, raising questions about their resilience and potential for long-term growth.
The technology industry has faced several challenges during the 2022 bear market, including rising labour costs due to inflation, declining advertising revenues amid a weakening economy, and increased scrutiny of their valuations as interest rates rise. However, emerging technology themes such as blockchain, IoT, AI, metaverse and cybersecurity hold significant potential for long-term investors as they continue to disrupt and shape our cultural fabric at a remarkable pace. By keeping abreast of these niche investments, investors can take advantage of new opportunities in the rapidly evolving digital transformation landscape. This could lead to improved profitability and a stronger competitive advantage for technology companies that are able to adapt and effectively exploit these emerging technologies.
What should investors know about the tech market?
Still dominated by a few giants The technology sector has undergone a remarkable evolution over the past two decades, driven by countless innovations that have propelled it to unprecedented heights. Today, the top 10 technology companies alone boast a staggering combined market capitalization of nearly US$10 trillion on a global scale. Back in March 2000, the S&P 500 technology index (INDEXSP: NX) reached a peak of 989 points, having gained almost 500 points in the five years leading up to the dot-com bubble. During this time, the NASDAQ also achieved a record high of 5,000 points. Fast forward to February 2023, and the S&P 500 technology index had more than quadrupled, while the NASDAQ had more than doubled. This incredible growth has been driven by the dominance of industry giants, each of which has established a virtual monopoly in their respective sectors, including Tesla (NASDAQ: TSLA), Amazon (NASDAQ: AMZN), Alphabet (NASDAQ: GOOGL), Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), Netflix (NASDAQ: NFLX), and Meta Platforms (NASDAQ: META).
As technological innovation continues to disrupt industries at an unprecedented rate, it's essential for investors to closely monitor this dynamic and ever-changing market. The cards can be reshuffled at any time, and second-string companies can emerge as winners. Therefore, investors must stay vigilant and adaptable to identify emerging trends and capitalize on new opportunities.
Competition is intensifying The technology industry is heavily concentrated in North America, Asia, and Europe, which collectively hold the majority of the global market share. North America currently dominates the market with a 35% share, followed closely by Asia with 31%, and Europe with 22%. However, recent years have seen notable advancements in the technology industries of Africa and Latin America, providing significant investment opportunities for private market investors in both debt and equity. As these regions continue to develop, they could become increasingly competitive players in the global tech industry.
The Asia Pacific region is further strengthening its position in the global hi-tech goods industry, with over three-quarters of the hi-tech goods turnover projected to be generated in the region by 2026. China's investment in semiconductor manufacturing is expected to be the primary driver of Asia Pacific's growing dominance, with lower-value assembly functions being transferred to other Asian countries.
Global competition is intensifying, and the hi-tech goods industry is becoming a battleground for political tensions worldwide. China's massive government subsidies for its domestic semiconductor industry, rapid adoption of innovation, and global M&A strategies by Chinese companies have raised concerns in Western countries. As a result, these countries are determined to respond with protective measures to safeguard their own interests.
The rise of new phoenix
The ongoing technology crisis could serve as a catalyst for a significant reshaping of the global competitive landscape. This crisis could provide opportunities for emerging technological innovations to take centre stage, as well as the emergence of new technology hubs around the world that can challenge the limits of current monopolies. As the industry evolves, these new players could disrupt the existing power dynamics and create a more diverse and competitive marketplace. However, established tech giants also have the potential to adapt and innovate, allowing them to maintain their position at the forefront of the industry. The future of the technology industry is uncertain, but it's clear that change is inevitable, and investors must stay informed and adaptable to thrive in this dynamic landscape
Several disruptive technologies are driving transformation in the tech industry, with Artificial Intelligence (AI), 3D printing, blockchain, IoT, robotics, electric vehicles, batteries, renewable energy, and automation at the forefront of the fourth industrial revolution's growth potential. The AI market's value soared to US$136.55 billion in 2022, with research and innovation driving adoption in the automotive, healthcare, and finance industries. Companies in these sectors are leveraging AI-based solutions like machine learning, robotics, neurolinguistic programming, and advanced querying methods to gain a competitive advantage and improve efficiency. Although 3D printing remains a niche market, it's gaining momentum rapidly, with a value of US$16.75 billion in 2022. Its ability to produce complex parts, offer mass customization, and streamline manufacturing processes is driving its growth. Blockchain is another technology generating significant interest, with a global market value of US$10.02 billion in 2022. Within this space, Decentralized Finance (DeFi) is emerging as a new financial technology based on blockchain, reducing banks' control over financial services and money and enabling greater financial freedom. As DeFi matures, it has the potential to transform traditional financial systems and democratize access to financial services.
Semiconductor, a special case The semiconductor market is currently polarized between consumer-driven and enterprise-driven markets. As global tech companies increasingly focus on the production of high-value and innovative products, such as electronic components, the demand for semiconductor production is rising. This shift in focus comes at a time when limited growth is expected in consumer products. Despite concerns over macroeconomic slowdown and geopolitical tensions, enterprise-driven markets, including enterprise networking, enterprise computing, industrial, medical, and commercial transportation, have proven relatively resilient. The relative strength in the enterprise-driven markets can be attributed to strategic investments by corporations and governments worldwide, which are offering incentives such as direct subsidies, tax reliefs, and infrastructure spending to attract significant investment in component manufacturing.
How to invest in the tech market
The Tech-market offers a vast range of opportunities for investors to gain exposure to transformative and disruptive technologies. It's crucial for investors to stay up-to-date with the latest trends and developments as these disruptive technologies continue to evolve and transform industries.
Investors with a time horizon of at least two years, and preferably longer, should consider buying technology stocks in a diversified manner. One option is to use an ETF such as the Nasdaq-100 index fund, which tracks the performance of the top 100 non-financial companies listed on the Nasdaq exchange. This provides exposure to the technology sector while minimizing risk through diversification.
For more advanced investors willing to do their research, there are various options to consider. Large-cap technology stocks are a good starting point, but it's also possible to focus on specific niche sectors such as AI, robotics, e-sports, virtual reality, and blockchain. With the rapid pace of innovation in the tech industry, investors should be diligent in their research and keep a watchful eye on market trends and developments.