What to make of investing today?

With Paul Gibson, Director & Chartered Financial Planner

Well what a year it has been so far.  Covid-19 has been the most disruptive pandemic for a century and rather than coming together to eradicate the disease quickly, many countries have argued and competed, while communicating chaotic, disjointed messages to the nation.  This has led to a significant hindering of Global economic activity compared to previous years.

Traditional businesses like retail, leisure, banking, oil and mining have all seen a significant reduction in earnings due to lockdown restrictions.  As a result, share prices have dipped as profits seem likely to be lower for longer.  In the UK, more people are out of work and the Office of National Statistics (ONS) recently announced that to the end of July the claimant count had risen to 2.7m people.

Staggering levels of additional Global Government borrowing and printing money have shielded us from the worst of the economic effects.

However, amidst the disruption there are still green shoots, namely a substantial amount of economic activity in the technology sector.  With many of us being forced to work from home during lockdown, apps like Zoom, shopping online and upgrading your home internet or software have helped the tech sector to maintain and even increase profits right in the eye of the storm.

One of the important things to remember is that almost none of the large tech companies are based in the UK.  Amazon, Apple, Microsoft and Tesla are all listed on the US stock market with two of the world’s largest companies; Alibaba and Tencent listed in China.

So far this year, the US index of Technology (the NASDAQ) shares have risen by 18.6% (to 14th September).  Indeed the value of all Apple shares are roughly the same value as the 100 largest shares listed on the main UK market combined (Shell, AstraZeneca, HSBC, Prudential and Unilever to name 5).

Whilst profits have risen, they haven’t risen much and some say that this is starting to feel like a speculative bubble with a self-fulfilling cycle of prices rising and catching the eye of investors who then want to take part and buy more, which pushes the price up higher.  Indeed there has been a slight wobble in September with the NASDAQ falling 5.8% since the 1st of September (to 14th September).  This was partly caused by a revelation that a Japanese Conglomerate known as Softbank was behind some of the largest speculative bets in history that the price of technology shares would rise inexorably higher, rather than any increase in underlying profits.  Some have also stated that some of the companies in question have barely increased profits in over 5 years, yet their prices have risen 3 or 4 times in value during this period.

So what shall we make of it all?  We are now and will continue to spend more of our work, leisure and retail time online and the tech companies that can capitalise on this to make a profit will do well.  Big household name technology companies are certainly an important part of a balanced portfolio of investments.  But it is important not to get caught up in blind excitement when buying an investment regardless of price and also not to be focussed on buying one sector.  Many companies in other, traditional sectors are embracing technology and using it to cut their costs, or to gain a competitive advantage and make themselves more profitable.  Think of the big retailers moving to more online selling and utilising robots in enormous warehouses to make their logistics more efficient. Think of cloud computing replacing those enormous computer mainframes and IT departments at a fraction of the cost in offices, and think of computer programming & learning, where many customer service functions have been replaced by livechats where it’s actuality a computer you are speaking to, rather than a human being.

As a result of this pandemic we have found technology has helped overcome some of the restrictions we have faced and embraced its use faster than we had ever imagined (anyone heard of Zoom before this year?).  Technology is firmly a part of modern life, especially with covid restrictions persisting.  Smart use of technology in the corporate world has the power to both reduce costs and gain an advantage over rivals to take market share.  Use it, embrace it, but keep an eye on the price you are paying for the popular shares.

It is important to note that investment portfolios we recommend at Active Chartered Financial Planners are well diversified across industry sector, asset type and geographical location as no one knows what tomorrow may bring.  Our aim is to provide clients with more consistent, less volatile returns investing over the longer term.

The information provided must not be considered as financial advice. 

We always recommend that you seek financial advice before making any financial decisions

The value of investments and income from them can fluctuate (this may partially be the result of exchange rate fluctuations) and investors may get back less than the amount invested. 

 Past performance is not a guide to future performance

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