Can US technology have another good decade?
US technology companies have dominated investment returns over the last decade. Is this likely to continue in the next ten years?
The last decade was the American decade. The US economy recovered faster from the western banking crash and slump of 2008-9 than the other advanced countries and sustained its growth for ten years.
The US stock market produced the star companies of the western world in the technology area. Apple dominated in consumer-friendly mobile computers and phones. Google took care of hunting the web. Facebook pioneered new ways of using social media. Amazon ripped into traditional retailing with its large-scale online presence. Microsoft continued to power many of the world’s computers with its software, whilst Netflix transformed home entertainment.
The result of the faster growth and the technological dominance was a big outperformance by the US stock markets compared to the rest. Last year, Nasdaq produced a stellar return of 35%, leaving the German Dax and the UK domestic FTSE 250 Index behind as they put in a very creditable 25% gain. The emerging market economies and stock markets also struggled to keep up, with some badly holed by domestic economic and political problems. Last year, the Hong Kong Index only managed a gain of 13% as an economic slowdown in mainland China coincided with the outbreak of unrest over the democratic rights of Hong Kong citizens.
The rest fight back
Some say the new decade will see a switch from US leadership and dominance to a new pattern of returns. After all, the US has been so successful its shares are now more expensive. Its larger companies are open to more challenge from regulators and tax authorities worldwide, whilst competitors will start to catch up. On this theory, now would be a good time to take profits on US technology and put the money to work elsewhere.
The truth is, however, that equity markets around the world have all got dearer. They too have been bid up by people seeking income and searching for returns in a world of near zero interest rates in most of the advanced countries. This has forced investors to accept more risk if they want more return. With inflation low and bond prices very high, with income on deposits and bonds low, share markets can stay high for longer. So far, the apparently expensive growth stocks and sectors have outperformed the apparently cheaper recovery and cyclical stocks. In part, this is because they have often delivered the superior earnings and dividend growth expected of them.
Apple is now on a 24 times earnings multiple, which is not high in modern markets. This reflects investors’ fears that Apple is not about to find the next exciting product to equal the success of the iPhone and iPad. Meanwhile, Amazon is on 80 times earnings, with investors liking the aggressive revenue growth and expecting that to translate to more cash and profit in due course.
More of the same
The turn of the year and the turn of the decade do not of themselves change much. People may make new resolutions. Some businesses may adjust their strategies, but the same economic constraints and state of technical knowledge remains. It looks as if the new decade will start as the old one left off. There will be low inflation, low interest rates, very expensive bonds, and continuing growth of revenues by the technology companies at the expense of older business models. Online retail can still take more sales away from shops. Social media advertising is still more attractive than traditional media to many users. The US is still boosting its economy with fiscal and monetary injections more than the Eurozone or Japan. China is slowing and preoccupied by trying to sort out past lending and banking issues.
With more talk of environmentally and socially responsible investing, some of the traditional sectors are in for bad times. More investors are going to screen out various large companies and whole sectors. Pressure is going to be put on oil companies, car companies, shipping companies, airlines and the rest to spend more on green matters and earn less from traditional business ways of doing things. This will further strengthen enthusiasm for the new and for technology.
Equity markets are a lot dearer than a year ago and are demanding more of companies. Investors, however, still face the dilemma of what to do with their cash if they do not like share valuations. It looks as if the artificial markets boosted by central banks can continue for a bit longer. Within that, US technology still warrants a good place in portfolios.
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John Redwood is Chief Global Strategist at Charles Stanley & Co. Limited, which is authorised and regulated by the Financial Conduct Authority.