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Market watch

TECHNOLOGY SECTOR - EYE ON THE LONG RUN AMID COVID-19 VOLATILITY

Issue date: 2020-06-30

By Franklin Templeton

  • Rebound in the US market is expected in second half of the year once the US economy normalises and is supported by the USD 6 trillion in monetary and fiscal stimulus.
  • Similar to other sectors, outlook of the Technology Sector is uncertain because of the recent market volatility and coronavirus, however, we believe Digital Transformation could be accelerated as consumers and businesses learn new ways to shop, be entertained, work and receive healthcare.
  • Sector valuation has become much more reasonable recently and there are many opportunities in high quality growth companies at a discount to fair value.

The spread of the coronavirus (COVID-19) has caused market volatility and possibly economic downturn and the technology sector is no exception. However, we are seeing the transformations of corporate operations and people’s daily livings with the modern technological advancements.

Long Term US Economy Remains Healthy

While it’s clear that the United States will presumably fall into recession (defined as two quarters of negative GDP growth), we see this sharp downturn as temporary. The long economic expansion was clearly in the later part of the cycle.  There is no doubt that the impact of economic shutdowns on employment and consumer spending will be significant, especially in sectors like travel, hospitality and traditional retail business. We’ve seen opportunities to initiate or add to positions in what we consider to be high-quality, long-term growth companies that are well-positioned for the future, for example, technology sector being more resilient to market volatility.

Digital Transformations in Daily Livings

We believe that all businesses will need to invest more in digital technology to better understand and service their customers and partners at a competitive cost. We invest in the highest-quality leading and emerging digital disrupters and those high-quality technology vendors helping businesses digitally transform.

A more rapid adoption of cloud-based applications for enterprises, and even smaller companies may look for suitable tools to allow employees to work remotely. Companies with software that facilitate virtual meetings are also potential winners as traditional face-to-face interactions move into online environments.

Sector Valuation Remains Reasonable

Market valuations have peaked in early February (Chart 2), and the technology sector has been a relative outperformer during this period (Chart 3). We are seeing good opportunities across the sector now as many of the highest quality growth companies offer good discount to their long-term fair value.

Potential Risks to Consider

Aside from COVID-19, the key risks we are currently monitoring include a focus on aggregate demand. While companies highly leveraged to the digital transformation theme have been reporting solid fundamentals, which we expect to continue, results from legacy technology companies (including personal computers and “on-premise” data centre infrastructure) suggest that overall enterprise technology demand is slowing a bit. If investor expectations come under pressure, the share prices of many higher-valuation businesses could come under pressure, even while their business fundamentals remain intact.

Digital Transformation Is Supporting the Technology Sector

We remain focused on the highest-quality businesses aligned strongly with the Digital Transformation theme and its associated sub-themes: artificial intelligence (AI) and machine learning, cloud computing, data analytics, IoT (internet of things), cybersecurity, software as a service (SaaS), e-commerce, fintech and digital payments, digital advertising, customer insights, collaboration and workflow, DevOps (software development and IT operations), 5G network communications and more.

As long-term investors, we believe that this pandemic will ultimately pass and that the economic damage, while severe in the short term, will subside as consumers emerge looking for new opportunities with pent up demand for goods and services.

  1. Source: Bloomberg and Franklin Templeton, from 18 November 2019 to 25 March 2020. Past performance is no guarantee of future results. Indices are unmanaged, and one cannot invest directly in an index. 
     
  2. Source for Price-to-Earnings Ratio: © 2020 FactSet, 27 March 2020. Price-to-Earnings Ratio is based on an estimate of Next-Twelve-Months (NTM). Copyright © 2020, S&P Dow Jones Indices LLC. All rights reserved. Past performance is no guarantee of future results. Indices are unmanaged, and one cannot invest directly in an index.
    Source for recessions: National Bureau of Economic Research. 
     
  3. Source for Earnings-Per-Share: © 2020 FactSet, 27 March 2020. Earnings-Per-Share is based on an estimate of Next-Twelve-Months (NTM). Copyright © 2020, S&P Dow Jones Indices LLC. All rights reserved. Past performance is no guarantee of future results. Indices are unmanaged, and one cannot invest directly in an index. 
    Source for recessions: National Bureau of Economic Research.

Copyright © 2020. Franklin Templeton Investments. All rights reserved.

Franklin Templeton Investments (Asia) Limited is the issuer of this document. The comments, opinions, and estimates contained herein are based on or derived from publicly available information from sources that Franklin Templeton Investments believes to be reliable. The document, which is for informational purposes only, sets forth our views as of the date published. The stock provided is for illustration purpose only. It is not a recommendation to purchase, sell or hold any particular security. 

The stock identified is not necessary indicative of a portfolio's holding at any one time. The underlying assumptions and these views are subject to change without notice. There is no guarantee that any forecasts expressed will be realized. Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from use of this report or any information, opinion or estimate herein. This document has not been reviewed by the Securities and Futures Commission of Hong Kong.



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