Why Do We Still Like The Chinese Technology Sector?

The author is Standard Chartered Bank Wealth Management Group

The stock markets in general have come under pressure as we move towards a seasonally weak period and fears over a rate hike in the U.S. increase.

This has resulted in the more defensive areas of the market, such as staples and utilities, being well supported by the market. Technology has, on the other hand, marginally underperformed year-to-date.

We continue to like the sector as it can be seen as relatively defensive (due to strong free cash flows and balance sheets) but, at the same time, cyclical (with earnings fluctuating with the variations in the economy).

Why do we still like the Technology sector?

With the sector as a whole offering a cash positive balance sheet, we would expect the sector to be relatively well supported during any significant market sell-off.

As the underlying economy starts to strengthen, which is our base case, we expect the sector to benefit from an improvement in the business investment cycle.

The average age of technology equipment, such as PCs, is high and the renewal cycle is expected to improve as companies start to feel more comfortable about the future.

Governments around the world are slowly shifting away from austerity and, comprising 20% of spend in technology, are expected to be a contributor of overall demand for technology related goods and services.

The sector also has good exposure to the emerging markets where demand growth is structurally strong. In the case of the smart- phone market, penetration rates in Asia are a fraction of that in the U.S. and are likely to increase over time as people become wealthier.

Lastly, the technology sector is not expensive relative to its own history and in certain markets, such as the U.S., is trading at a discount to the local market indices.

On a twelve months view, equities are expected to outperform other asset classes. The technology sector, meanwhile, is expected to outperform the general market.

Underweight investors could consider using any significant short term volatility to add to their Technology exposure. While volatility may pick up, we place a greater than 50% probability to any pullback in global equities being less than 5% and an 85% probability that it would be less than 10%.

(The article has been edited for clarity)

Caishen.Co - Primary Data for China Secondary Investment and Stock Markets
Caishen.Co - Primary Data for China Secondary Investment and Stock Markets