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Over the last year, the technology sector has operated under a cloud of geopolitical confrontation. The growing trade war between the U.S. and China has hit tech valuations for companies exposed to the Chinese market and, at time of writing, there appears to be no end in sight to the tit-for-tat rounds of tariffs between the two superpowers.
At the same time, tech companies with less exposure to tariffs have continued to perform well. The S&P’s new communications services sector, comprising household names like Alphabet and Facebook, has returned 10 percent over the last year, comfortably beating the broader market. Areas such as 5G, new consumer electronics and cyber-security are set to drive further growth.
Despite these exciting developments, front of mind for most investors remains the U.S.-China trade war. ‘There’s a lot of money at stake,’ says Seth Rosenwasser, senior technology analyst at Nasdaq IR Intelligence in San Francisco. ‘And aside from the money, we’re talking about a geopolitical battle for who holds the reins of the future of technology. That’s one of the core themes buried in the whole dispute.’
Semiconductor companies like Intel, Micron Technology and NVIDIA are among those affected by the tariffs, with some moving operations out of China to mitigate the impact. ‘At the center, you have semiconductor companies that are having their supply chains disrupted, and it’s really affecting their bottom lines. We’ve seen that in the earnings over the last couple of quarters,’ says Rosenwasser.
Tech investors, keen to mitigate the effects of the trade war, have increasingly turned to software developers as a perceived safe haven. ‘As the situation unfolds in semiconductors, a lot of questions are being lobbed at software companies about how they will be affected. Generally speaking, software companies – especially the smaller ones – have a much smaller footprint and less exposure to China,’ says Rosenwasser.
Other factors keeping investors positive are new product launches and the game-changing potential of 5G. ‘Those two points are probably going to interact at some point next year when US carriers start producing phones that are capable of handling a 5G network,’ says Rosenwasser. ‘The consumer electronics cycle is still maintaining a lot of healthy demand within the semiconductor ecosystem. And the 5G roll out, with all of its affected areas, is adding another bolster to a space that has some pretty serious issues surrounding it.’
For investors trying to take advantage of these emerging trends, most are betting on the U.S. market above others, Rosenwasser adds. With geopolitical uncertainty affecting a slew of regions, from Europe to South America and the Middle East, investors are looking for the safest places to invest. ‘When you have an uptick of risk around the world, the money is naturally going to flow to where it is least risky,’ he says.
‘One of the reasons the U.S. equity market has been so strong is because developed countries are shifting their mandates,’ continues Rosenwasser, citing recent news reports that Norges, manager of Norway’s huge sovereign wealth fund, plans to lower equity exposure in Europe and raise it in the US. ‘This is an example of the movement of capital to where the world sees the most immediate near-term opportunity.’
Finally, one tech area that may not yet have received the attention it deserves is cyber-security. ‘This is a theme I will be keeping an eye on because we’re heading for a world where software and technology are becoming ever-bigger cogs in our lives, and I think one aspect that may have gone to the side is the security of the whole operation,’ says Rosenwasser. ‘I think there’s going to be a material reset toward data protection and privacy – and cyber-security is going to play a huge role in that.’
While acknowledging that hacks and data breaches are not a new development, Rosenwasser says cyber-security is set to move up on the agenda for corporate executives. ‘It’s going to reach a point where it is top of mind for management teams that want to reassure their investing audience,’ he concludes.
