Technology stocks in 2021: A passing fad or a long term play?
2020 was the year when the world shut down and went online. The global lockdowns triggered new ways of working and living, and almost everyone suddenly learned how to use an obscure video communication tool called Zoom.
That was also the year investors put their money in technology stocks like FAANG and Zoom Video Communication, among others. Consequently, the tech heavy Nasdaq-100 index jumped over 49% in 2020, climbing from 8900 points to over 13,100 points by year end. The Nasdaq Composite Index rose 43.8% to 13,200 points, while the S&P 500 index rose 15.9% to over 3,700 points within the same period, driven by the same trading activity in technology stocks.
Safety in technology stocks in 2020, less so in 2021
Mooris Tjioe, investment analyst at Phillip Futures, offered a unique perspective on that trend. “In 2020, technology stocks were a safe haven investment for a lot of investors because of the pandemic, and rightly so,” said Tjioe.
“We saw major structural shifts in the way society worked – including working from home, tightened restrictions on gatherings and large scale events, and other anti-retail measures taken to control the spread of Covid-19. In that respect, investing in technology companies was a perfectly justifiable, sensible play.”
On the other hand, he cautions that the market is changing in 2021 and investors may not want to be caught off-guard. “The key difference between 2020 and 2021, is that pandemic control measures are starting to show results and global economies are thinking about re-opening.”
“Some of the structural shifts in society we’ve seen will start to unwind, and it will be difficult to justify some of the current high valuations in these technology stocks. That is, unless these companies have been working on diversifying their products and services into sectors that remain relevant in a post-pandemic world.”
One such structural shift, could come from the central banks. “A lot of the stock market rallies have had to do with what we refer to as ‘unlimited quantitative easing’. Many governments also helped to fuel this by engaging in extreme deficit spending.”
“Once labour markets recover, you can expect that central banks will ‘take away the punch bowl’ by tightening liquidity, and governments will think about increasing tax revenue to offset some of the pandemic-era deficits. When this happens, the first victims will likely be the main beneficiaries of these policies in the first place, like the technology stocks with inflated valuations.”
Technology sectors to watch in 2021
So which technology sectors should investors avoid in 2021 and which should they keep their eye out for?
Tjioe believes social media and digital advertising related technology businesses could face greater scrutiny and regulation, starting with Facebook. “The pandemic showed the world how social media could galvanise certain segments of society towards anti-vaccine and anti-government sentiments, so it is unlikely that governments will let that go unregulated.”
“What’s more, the recent face-off between Facebook and the Australian authorities has revealed a new key theme – that governments and social media companies both have a vested interest in paying old, reputable news companies to ensure a steady stream of quality news reporting. Facebook’s move to cut news feeds in Australia was also likely a mis-step of epic proportions, that has awakened many governments and societies to the power these companies have over our lives. Thus, without a decisive shift in their business model, I’d see a greater limit on the upside potential for these equities.”
Another area that could face greater correction in 2021 is the electric vehicles segment. “Electric vehicles and related technologies are likely to be a big part of our future, but their future potential appears to have already been priced in. At the same time, there could be further downside risks from chip and rare metal shortages, a failure to miniaturise and improve battery technology, as well as a growing concern over the destructive ecological impact of electrical vehicle battery production.”
Tjioe recommends investors look at payment and fintech companies. “Innovation in that space has continued to grow, with the pandemic leaving the global population more ready than ever for online-centric lifestyles. That ranges from e-commerce, to personal finance management, and remote work. This trend will continue to be a huge boost for the payments and fintech industry, with a lot of potential for growth in both emerging and developed economies.”
Risk management in a post pandemic market
If you are looking at trading technology stocks in 2021 and beyond, Tjioe recommends that investors conduct robust due diligence before entering their positions, and diversify their portfolios. “Many investors make the common mistake of being overly concentrated in one sector or one geography. If more than half of your portfolio is in US equities, that could be relatively high-risk in geographical concentration and you could think about diversifying into other territories, like Singapore.”
Phillip Futures offers financial derivatives which can be used to help investors manage their risk, and provides one-to-one coaching sessions to help investors with basic hedging strategies.
Investors could also trade on a multi-asset platform such as the Phillip MetaTrader 5 (MT5) platform. Phillip MT5 offers an expanded range of asset classes including Forex, Gold, and Crude Oil, Indices and Shares CFDs. It is also integrated with Trading Central indicators and the powerful Autochartist pattern recognition tool.