1. Newsroom
  2. Tech sector driven by innovation
Menu
UBP in the press 18.10.2018

Tech sector driven by innovation

Tech sector driven by innovation

Sphere (10.2018) - Since the 2008-09 global financial crisis, the global technology sector has delivered an impressive annual return of 15.4%, easily outpacing global equities as a whole (10.2%).


Shift in performance drivers

2018 appears to be no different with global technology shares rising almost 11.6% by mid-October, well ahead of global equities (-0.6%).

Prior to 2018, performances in the tech sector benefited mainly from earnings, dividends and P/E expansion. While many investors are right to believe that earnings growth has been the main force behind the technology sector’s performance since the crisis, earnings have actually accounted for only 49% of total returns. P/E expansion has been another significant booster, accounting for 37% of total returns over the period.

Focusing on year-to-date performance, dynamics have shifted dramatically. Earnings growth has been by far the largest contributor to returns, while P/E ratios now appear to be a headwind.

It appears unlikely that P/Es can resume their role driving returns in the technology sector, as was the case following the financial crisis. Aside from the early-2000s bubble in technology stocks, the global sector has traded around 22–25x trailing earnings in periods when the global economy has not been in recession or crisis. It has become apparent that, in the absence of a bubble, the technology sector will no longer be able to rely on P/E re-rating for returns in the years ahead.

Although sector multiples may not expand much further in the future, the tech sector can continue to rely on innovation to create new sources of revenue and profits.

Major technology trends

There are some very powerful trends driving the performance of tech stocks. MIT economists Erik Brynjolfsson and Andrew McAfee, in their book entitled “The Second Machine Age”, brilliantly explained the forces at work in the current technological revolution. This revolution is generating considerable productivity gains, which according to the authors have been the main support for US GDP in the last few decades. Eventually, productivity gains turn into revenue and profits for innovative companies. Share prices can then rise.

A large number of sectors and industries are riding the current wave of innovation, and several areas are particularly exciting. They include, in no particular order, self-driving cars, artificial intelligence, blockchain, video games and, still, internet services.

Internet services

The web sector is symbolic of the technological revolution we are experiencing. Internet giants have unique characteristics. They have dominant market shares: 80% for Facebook (worldwide, outside China) and more than 70% for the Google search engine. Netflix has an estimated 70% share of the paid video streaming market. Paypal also has a 73% market share according to Forrester. This is a very unusual market structure, especially since the average revenue growth rate for all of these companies combined is expected to be 26% in 2018. These companies are therefore massively outperforming their peers in other sectors, and are also growing at a spectacular pace despite being very large already. How long can this growth continue? One clue is given by end-market penetration. The aforementioned four companies have only achieved 32% market penetration, and so there is scope for them to continue growing for a good while to come. It is likely that the questions arising from their dominance are far from being answered.

One challenge for global Internet service companies today is China, where restrictions against foreign operators have allowed the development of domestic giants in their place, including Baidu (the Google of China), WeChat (the equivalent of Facebook), Weibo (Twitter), iQiyi (Netflix) and Alibaba (Amazon).

Video games

Since the latest generation of consoles was launched, we have seen a video-game renaissance. The market’s competitive structure has favoured the incumbents because of the constantly rising cost of producing new games, along with the importance of intellectual property and franchises. In addition, the digitalisation of video games has improved margins. For example, Sony’s Game & Network Services division is growing revenue at a rate of more than 35% with margins sharply higher on increased PS4 software sales.

But although existing positions have been strengthened, new opportunities have also arisen. Video games are being streamed on an unprecedented scale and gaming is taking an ever-growing place in people’s lives, particularly among millennials. People are also forging entire careers by taking part in e-sports – video game competitions. There is also no doubt that the imminent virtual reality wave will take the industry to the next level. We fully expect video-game producers to take advantage of these new technologies. Again in China, the gaming sector is dominated by two local players, Tencent and NetEase, which together control 70% of the market (Tencent 45%), but depends on both local and foreign game developers.

Read the full article

Leegenhoek-Julien-150x150.jpg
Julien Leegenhoek
Technology Equity Analyst

Asset class

Japanese equities

Why the current outlook makes a compelling case for Japanese equities

Watch the videos

Most read

UBP in the press 02.04.2019

Zurich: a nerve centre for UBP

Le Temps (29.03.2019) - UBP, which acquired Coutts exactly four years ago, has doubled the amount of assets it manages in Zurich to CHF 25 billion in five years. We spoke to Adrian Künzi, who has headed UBP’s local branch for the last year.

UBP in the press 03.12.2018

It’s all in the family for Union Bancaire Privée's de Picciotto

The Straits Times (25.11.2018) - As times change, CEO’s ambition is to make UBP one of the biggest family-owned banks.

UBP in the press 26.03.2019

UBP is ready for all Brexit eventualities

AWP (25.03.2019) - Union Bancaire Privée (UBP) anticipated the uncertainties surrounding future relations between the United Kingdom and the European Union. By expanding in London with the acquisition of ACPI and maintaining a strong presence in Luxembourg, the Geneva bank is prepared for any outcome, as its CEO Guy de Picciotto explained to AWP.

Further reading

UBP in the press 23.05.2019

Trade dispute supports gold price

Finanz und Wirtschaft (18.05.2019) - Since the end of February, the stronger US dollar and the firmer equity markets have put a lid on gold prices.

UBP in the press 20.05.2019

Distinction between private and institutional clients fades

Le Temps (20.05.2019) - Wealth management professionals have all noticed that every year the line between private and institutional clients is fading and their specific needs, which used to be so different, are becoming increasingly similar. And the trend is not a passing one.

UBP in the press 09.05.2019

China is the place to invest in equities

Bilan (24.04.2019) - Since China joined the WTO in 2001 and adopted a capitalist approach to its economy, investors have viewed the local financial markets with an equal mix of hope and fear.