The growing importance of the technology sector

Sep 11, 2020 | Elinesky Schuett Private Wealth Management


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Our thoughts on the recent movements in the market and insight into the growing importance of the technology sector are featured in this week's blog post. The 10-Minute Take podcast included this week is also focused on the technology sector.

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Global equity markets experienced some jitteriness over the past week, following through on some of the weakness that began the week before. We provide a bit more insight on the recent action and address the growing importance of the technology sector. We also provide an update on the coronavirus front, with particular attention paid to the rising trend of cases in various parts of the world, including Canada, and a setback on one of the vaccines being explored in a late-stage trial.

Coronavirus update

While investors are not as concerned as they once were, the virus continues to spread throughout the world. Canada has seen its average new daily case levels trend higher in recent weeks, indicating that the rate of spread is now rising after a period of stagnation. While the figures remain well below the levels seen during the first wave, it bears monitoring, particularly in light of the back to school and fall seasons, where indoor gatherings will become more prevalent.

Elsewhere, India, Indonesia, the Middle East, and Europe are all facing escalating situations. India surpassed Brazil as the country with the second highest number of cases. It recorded a daily record for any country of more than 90,000 new cases, suggesting that there is no sign of its spread slowing. Meanwhile, the Indonesian capital of Jakarta has enforced a strict lockdown to try to contain the spread of the virus which is putting serious strain on the city’s health care infrastructure. Across the Middle East, a host of countries are grappling with rising cases and Israel, for example, is exploring a broad lockdown given accelerating levels of new daily cases. Countries such as France and Spain have surpassed their own record new daily infection levels witnessed months ago.

Despite the ongoing pandemic, investors remain less concerned than they were earlier this year. The rationale is based on the view that fatality rates are lower and governments are likely to employ more localized containment approaches instead of the full scale lockdowns seen across much of the world months ago. Furthermore, hope for a vaccine remains relatively high. On this front, some disappointing news over the past week should serve to remind investors that developing a vaccine that is safe and effective is a difficult task and is by no means guaranteed. A late-stage vaccine trial was temporarily suspended for safety reasons after one participant developed a neurological condition. The case is being investigated further. These kinds of suspensions are not uncommon in clinical trials, and the trial itself may continue at some point.

Market concentration

Markets sold off over the past week, continuing a trend that started just over a week ago. Notably, the level of volatility this past week did not increase but remained relatively flat, suggesting investor anxiety has not deteriorated and the action remains reasonable and relatively normal. The market decline is being led by higher growth stocks, many of whom happen to be tied to technology products or services in one way or another. Many of these stocks have led the market higher since the lows in March, and so it’s not a real surprise to see investors taking some profits at this juncture.

In our view, what is more interesting and worth appreciating, is how meaningful the technology sector has become. About five years ago, the sector represented a two percent weight in the Canadian equity market and a much more substantial 20 percent weight in the U.S. Today, those weights are nearly 10 percent and just under 30 percent respectively. These numbers are even higher if you factor in stocks that are classified as being in other sectors but are very much technology oriented.

The level of concentration is not necessarily uncommon. In Canada, the Financials, Energy, Materials, and Technology sectors have all accounted for a much higher weight in the market at one point in history. In the U.S., some of these same sectors, in addition to Healthcare, have also been significant weights in the market, albeit not as high as technology is today. Furthermore, the level of concentration tied to a few stocks or sectors is actually higher in other parts of the world like South Korea, India, Germany, France, Italy, and Australia for example. Nonetheless, there’s no denying the fact that technology and related areas have grown in their significance and are now a much more important driver of equity market returns and risk in North America and beyond.

Our investment approach remains focused on ensuring the proper level of risk is being taken over time to deliver on required outcomes. This level of risk is unique to each client, and may also be quite different than the stock market itself. Unlike the broader market, we have the ability to actively manage our client portfolios to ensure that appropriate exposure across asset classes and sectors is being maintained in our portfolios at all times.


10-Minute Take

The 10-Minute Take is a podcast series dedicated to providing insights from RBC Economists and market experts on events unfolding around the globe.

Why tech has staying power, despite market sell-off

To many observers, last week’s dramatic sell-off of tech stocks was inevitable, especially given how fast they climbed since the March low. But the appeal of tech won’t fade anytime soon. The pandemic fundamentally altered behaviour (did anyone say work from home?) and set into motion a rethink of how companies will operate in a digital-first world – and what technologies they’ll need to succeed. So what does the performance of tech stocks actually reveal about investor sentiment? And how will tech-heavy markets fare with the uncertainty of future government stimulus? Alex Zukin, RBC Capital Markets’ Software Equity Analyst, shares why there are still tailwinds ahead for tech.

Listen to the latest 10-Minute Take podcasts online now: The 10-Minute Take.

Does your family have a succession plan? Tips for maintaining family harmony

The COVID-19 pandemic has forced many people to think more about their health and wealth — and what the future could look like for the next generation.

For enterprising, global families in particular, succession planning and family governance have always been an essential part of successful wealth planning, but the health crisis has been a reminder of how fragile life is and the importance of preparing for the future.

Read the full article online: Does your family have a succession plan?

How to recognize and prevent financial elder abuse

cid:image006.jpg@01D665CE.01B202C0This article takes a deep dive into what elder abuse is and shares some of the signs to be aware of that could help prevent it from happening in your family. Leanne Kaufman warns that elder abuse is very common, but not talked about enough. Read more

 

Community Corner

Each week, we like to end our posts with a few good news stories from in and around the community. We hope that they brighten your day!

As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.