The march of the technology titans

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Personal Investing

17 August 2020

Will US technology companies be as dominant in the next decade as they are today? Our Asset Allocation team weighs up the evidence.

They have become familiar names in many households. Anyone seen my Apple iPhone? What time is your Microsoft Teams meeting? What shall we watch on Netflix tonight? (that question is a bit more open to debate).

But much more straightforward, in the eyes of our Asset Allocation team at least, is the fact that the current pandemic has exaggerated a long-term investment theme that was already in existence: the rise of digitisation. (Digitisation is the process whereby text, pictures or sound are converted into a format that can be processed by a computer). Whether we are working from home, buying our weekly shop online, or staying in touch with friends and family through our mobile phone, we are all using data.

From a financial perspective, it is perhaps no coincidence then that the share prices of these US companies producing such digital services – the likes of Facebook*, Apple*, Amazon*, Alphabet (owners of *Google) and Microsoft* – are trading at, or close to, their all-time highs.

That may not mean much on its own but when looking how these stocks have grown in value let’s put it another way. In terms of the sheer size of these technology titans, the value of Apple, at over US$1.8tn[1], is now more than the combined value (US$1.1tn) of the 30 companies that make up the entire German stock market[2]. The comparison with Germany, the largest economy in Europe, is striking when the list of 30 companies includes such well-known, and well-established, names as sportswear manufacturer, Adidas*, pharmaceutical giant, Bayer*, and car manufacturer, Volkswagen*

Consider the risks, as well as the returns

Counting US technology companies among an investor’s holdings may, in our view, seem appealing to many. Indeed, over the long term, we are supportive of the long-term digitisation theme. However, shorter term, we continue to believe that risks to these businesses remain.

The five-hour questioning by US lawmakers of the company bosses of Facebook*, Apple*, Amazon*, and Alphabet* (the owners of Google*) over their failure to allow more competition into their respective fields is a good example of this.

Even though the outcome of the review didn’t move immediately the company share prices of those companies involved, we firmly believe that regulation of these large US technology companies is a reminder that they could well be the subject of greater scrutiny in the future.

New decade, new theme?

Undisputedly, technology companies have played a vital part in delivering essential goods and connecting loved ones during the recent lockdowns.

But tastes change. New types of businesses are constantly being created. Who, for example, even ten years ago, would have heard of sustainable, or ethical, investing? You can read more on our views about what types of companies we believe may likely emerge stronger as a result of the current pandemic here.

Who knows if the US technology companies will become as dominant a feature in the US stockmarket as they are now compared to 2030? That’s why our Asset Allocation team believes in favouring a broader range of investments. You can read more about this in our blog on diversification.

In short, we believe, investors may do well not to put all their eggs in the US technology basket.

 

[1] Source: Refinitiv DataStream as at 11 August 2020.

[2] Source: Refinitiv DataStream as at 12 August 2020.

Remember, the value of any investment is not guaranteed. The value of investments and any income received from can go down as well as up and you may not get back as much as you had originally invested.

*For illustrative purposes only. Reference to a particular security is on a historic basis and does not mean that the security is currently held or will be held within an LGIM portfolio. The above information does not constitute a recommendation to buy or sell any security.

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Please remember the value of your investment and any income from it may fall as well as rise and is not guaranteed. You may get back less than you invest . Tax rules for ISAs may change in the future and their tax advantages depend on your individual circumstances.

Please note the information, data and any references in this article were accurate at the time of writing. Please check the date of the content if you’re looking for up to date investment commentary or tax-year related information.

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