The tech sector has been on quite a rollercoaster ride in recent weeks. Although the tech-heavy NASDAQ is still up around 6% year to date, it has nonetheless fallen about 4% from the recent all-time high seen on February 12th. Jonathan Curtis, Vice President, Portfolio Manager at Franklin Equity Group, gives us his insight into what’s been driving all this volatility in tech stocks.

1. The Winners

2020 was a great year for the tech industry, as Covid-19 forced greater reliance on technology in work, education, entertainment, and e-commerce. Digital payment companies like Square and PayPal, as well as communications platforms like Twilio thrived during this period, and are expected to benefit even more with the reopening of the global economy. However, some investors are selling their stocks and buying names that would benefit more from reopening, as we’ve seen from the rotation into cyclical sectors.

2. Back to a New Normal

Some tech industries were hit hard by the pandemic, like semiconductors, back-office software used for business management, even digital payments that relied on cross-border dynamics, like Visa and MasterCard. Once the economy reopens, it might be worth taking a second look at these players, as people will eventually start travelling again and the industries that didn’t – or couldn’t – grow during the pandemic should start to see recovery. We might also see regular businesses allowing their employees to work from home more, since many companies have realized that they can be just as, if not more, productive with the proper planning and the right team-collaboration tools.

3. Cloudy Future

Long term investors like Franklin Templeton try to forecast what the world will look like in 3 to 5 years, and they are confident that there is going to be a lot more cloud computing done on platforms provided by Google, Amazon, Cloudflare, and Datadog. However with this comes another issue, as these companies don’t use or buy on-premise hardware, like servers or hard drives, and instead use services from the cloud operators that deploy their own hardware. With that in mind, some of the legacy client-server hardware companies might struggle in the years ahead, and Franklin Templeton noted that they might be avoiding this sector.

4. Bullish China

Curtis noted that they love innovative companies, regardless of whether they’re from China or the U.S. However, investing in China is less clear-cut due to its opaque regulatory landscape, as evidenced with the unexpected cancellation of the Ant IPO and the increased scrutiny that Alibaba has been facing since. With that in mind, Franklin Templeton has a higher country risk premium for China and keeps its position sizing on the smaller side.

5. Chip Challenge

The world is experiencing chip shortages partly due to high mobile phone and PC demands, and this is likely to continue even once trade reopens. On top of that, the world is continuing its push into the digital world, and as such there will be a greater demand for more advanced tech, like electric vehicles. This is likely to be good for semiconductor players like Taiwan Semiconductor Manufacturing Company (TSMC), as well as equipment and materials suppliers to those types of players, like ASML Holdings and KLA-Tencor.

What other areas in the tech sector do you think will change in the future? Let us know your thoughts.

Written by Toby Teh and Edited by Lyn Mak

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