Anthony Okolie speaks with Vitali Mossounov, Global Technology Analyst, TD Asset Management, about why some tech stocks have remained resilient during the coronavirus crisis and their outlook going forward.
- Vitali, technology has been one of the best performing sectors versus the broader index entering it to 2020, correct?
- Absolutely. It's been a pretty good ride, especially if you zoom out, take the last five years. You know, that period of time, 2015 to 2020, the market's done well. The overall market, the S&P 500, it's up 40%, about 7% per year. Not too shabby.
But technology, that's, you know, it's just been, wow. It's more than doubled the basket of technology companies over that period of time, And performance has been very, very strong.
- And when you talk about out performance, more recently, technology has been one of the few areas to weather the COVID-19 financial crisis much better than other areas. Is that correct as well?
- It's absolutely correct. And I think by way of background, there was a big debate among investors heading into COVID. Or, of course, we didn't know it would be COVID. But whatever crisis was on the horizon, whenever that would be.
There was this one camp of investors saying, tech's done very well. But when the next crisis comes, watch out below, right? This is going to fall. These companies are more expensive, they're more vulnerable.
There was another camp of investors, and I think we were firmly in that camp, that said, well, no, technology's becoming systemically more important to society. And so that next crisis might actually surface more value out of technology companies.
And so we're seeing that in the share price returns that, really, technology companies are generating in this crisis. You can see that the overall market, down 10% year to date. Technology companies are actually eking out slight gains. So certainly very impressive performance by technology companies, even in a crisis.
- So why has technology been so resilient to this crisis?
- Yeah, it's a good question. And I think immediately, when COVID hit us and there was this panic and uncertainty around us. The simple reason was really leverage and debt.
It's one of these things you don't think about until you have to. But technology companies, they don't really carry debt. These companies generate a lot of cash, they pay healthy dividends, they buy back stock, but they don't carry debt. And so investors didn't have to worry, is this company OK.
When its revenues fall, can it still service its debt. Will it be the debt holders that take the company away from me, the shareholder. There was no worry about that with tech companies, and so I think that was a beneficiary in the near term.
And then of course, as kind of the dust has settled and we've had time to really figure out where we are, as a society, what's become obvious is we're being deprived of the physical world, and our world is becoming increasingly confined to our digital surroundings.
And look at how much more we can do in this digital space. Look at how much value technology companies can deliver in that realm. And boy, how much could this be worth as we look out one, two, three, four, five, and more years.
- Vitali, what are some of the key COVID-19 themes that technology seems to be benefiting from?
- As you can imagine, as we're all observing, there's quite a few. Too many to talk about here, but I don't think we need to look too further than, actually, this conversation right here.
It's video calling, video conferencing, whatever it is that's the proper name for it. It's been around for a long time, but it's been kind of this, you know, maybe a more obscure technology that you use once in a while.
And right now, it's absolutely the panacea for people connecting with friends, for employees and connecting within businesses. And we have the data. Companies like Microsoft are disclosing that usage has just gone exponential. It's sort of become this critical technology.
I think down the road, I've heard some people dismiss this as, of course, temporary until we have a vaccine or until we go back out into the physical world. I don't think that's the case. And I think we're going to have a lot of management teams evaluating whether they need their employees at the office all the time.
We're going to have other management teams asking whether their employees need to travel for business as much as they've used to, or if they can do this and communicate the message as effectively, Tony.
- Certainly, we've talked about out performance of the sector. We've talked about some of the key themes and this new age of digital, just new digital world. But what are some potential downside risks or headwinds that could potentially hit this sector?
- Yeah, there's always something. And I think we've been talking about it with you for a couple of years now, but regulation is always one that we watch closely, especially for the larger technology companies.
Truth be told, I think more of the view now that it's less of a risk in this present environment. You're seeing technology companies becoming critical partners of governments as those struggle to respond to the digital needs of their citizens.
And so those companies are building up goodwill. Amazon, the sort of arch nemesis of Donald Trump, you're seeing them hiring a couple hundred thousand people to help out. So it's going to be incrementally more difficult to go after these companies in the next few years, especially as we have a recession at the doorstep.
And then I think, you know, this is kind of-- it's one of these temporary elements. But we're all, in the technology, are we now maybe benefiting from this increased work from home, the quarantine, and the more, you know, the physical constraints, the digital world?
On the other end to that, we are going to go back out. We are we are going to go and play sports again, and go to the arenas, and engage in these physical activities, probably, in the world.
And I think it's also important for investors not to get carried away with individual names, and not to sort of create bubbles and say, oh my gosh, this is-- the world's going to be like this forever. I'm only going to shop online. So there is always some caution warranted in certain pockets of the market.
- Vitali, we just have a few seconds left. But for investors who-- they want to diversify their investment portfolio by adding some exposure to the technology sector, how do they participate?
- Tony, I think those investors should take a firm look at the TD Global Technology Leaders Index ETF. Ticker's TD Tech as you know very well. And the mindset there is that it's a pure technology product, all technology companies on it.
It's global in the sense that you're participating in every developed market, not just the United States. It doesn't matter what index something is trading on, whether it's NASDAQ, or something in Europe, or in Japan.
Most importantly, it's designed to take advantage of technology themes. So we've thought of, what are the technology themes that are very prevalent today, like cloud computing or e-commerce.
What's out there in the future? More machine learning, and more blockchain, and that portfolio has been designed to allow investors to participate in these themes of today and of the future.
- Vitali, thank you very much for your time.
- Great to see you, Tony.