Show Transcript
The global selloff in technology stocks continues into October as leadership shifts to the energy sector. Will technology drive markets higher again in 2022? Kim Parlee speaks with Vitali Mossounov, portfolio manager, TD Asset Management.
Print Transcript
- Well, if you've been watching the markets, as many have over the past little while, you've seen a tug of war over leadership in the markets, where the technology sector leads and then, of course, rates shoot up and we see it fall behind and other-- of course-- sectors take the lead. But we've got someone here to tell us what he is paying attention to and some interesting charts for us to consider on the technology side.
Vitali Mossounov is Portfolio Manager for the TD Global Technology Leaders ETF. He joins us now. Vitali, it's been a while. It's great to talk to you. And I'm going to jump right in. You have brought a bunch of really interesting charts for us to take a look at. And I want to bring up the first one, and this is a look at share performance of tech shares versus the S&P. Tell me why this is interesting to you.
- Well, this is an interesting perspective that I think is worth sharing. What we've done here is plotted the performance of the S&P 500. So the so-called market against the S&P 500 technology stocks, so the tech sector. And we've indexed it to a date that's now in the history books. And that's November 9, 2020, the infamous Pfizer vaccine announcement. It's been 11 months since and what we're trying to demonstrate here is the real tug of war, as you said in your comments, between the tech sector and the rest of the market.
Periods of intense outperformance, periods of intense underperformance, but guess what? 11 months later we're at the same point. So, both of these the market and the tech sector, up 28%. To me, the message there is that there's a certain sustainability there about technology stocks. What I mean is that in a year, when there's inflation concerns, rates are rising, technology stocks have still been powering through. And that's an important takeaway for investors.
- It really is. And I mean, there's the investment thesis, there's also just the basic business thesis, the technologies and everything in demand is going up, no matter what direction we're going in. You've got another chart here, which I think is interesting, which is a look at earnings estimates. And again, this is comparing earnings estimates for technology companies versus non-tech. Tell me what's here. Because we do look at it and I see that the tech earnings are lower, but I'm assuming this is a bit of a growth story too. They tend to lag.
- Well, you caught me there. I tend to bring more promotional charts for tech, call it. But in this case, what's important to highlight, is actually it's been a year of anomalies. And so let me take a step back. What are we showing here? We're looking back all the way to June 2020. It seems like years ago, but only 15 months. And this was when the market was really at its trough of earnings expectations.
Things really-- people couldn't expect things to get worse. And from there, these 2021 earnings estimates that we're showing have just been rising for tech stocks and non-tech stocks. And what we're showing here is that while expectations for tech earnings have improved quite a bit-- they're are about 50% higher if you look closely-- expectations for non-tech stocks have done even better. The fundamentals there have been even stronger.
This is actually highly unusual. Tech stocks tend to have better fundamentals year in and year out. And so, to me, it's another signal that says, hey even in a year when tech hasn't been able to put up the same earnings growth and match the growth in the rest of the market, the share prices have kept up.
- Fascinating. OK, well let's go to this next one, which builds on what you just said. You know, the earnings look to be lagging a bit, but to your point, the stocks are keeping up. If we look at this chart coming up, they've more than kept up in terms of share appreciation. What do you see here?
- Well, this chart does put into perspective. You know, sometimes the question is, hey, we've seen non-tech stocks really have better fundamentals. They're cheaper than tech stocks. Shouldn't we just own these other sectors? And my response is always, well, do you think that the next 10 years are likely to be anything like the last 10 years? And the chart you have up on the screen right now is the last 10 years of fundamentals, the last 10 years of earnings growth. Again, for the market, and for tech we've indexed it to 100 back in September 2011.
And what you see here is a very, very clear story. The market stream of earnings has doubled in the last 10 years. That's great. Earnings doubling in 10 years, we'll take that. But the stream of earnings that technology companies generate has tripled. And so, even if you pay a premium for these companies, these superior fundamentals, they make it worth your while. If you think the next 10 years are going to mimic the chart you're seeing right now, then tech stocks are very, very well worth your time.
- I've only got about 30 seconds, Vitali, but I do want to touch on one of your largest single holdings in the ETF, Apple. What's your take on where they are and where they're going with their newest iPhones just out?
- Well the newest iPhone, not much of a surprise to anyone. Very incremental changes announced two weeks ago. So, you're not going to get fireworks. Don't expect any. But we think that there's a very large billion user install base with rather old phones. There's big promotions that Apple is pushing. So they should be able to keep that franchise going nicely. The bigger development is there's been a lot of regulatory developments in court and from regulators.
And the issue here comes down to Apple's app store. That's 15% of their profits. And Apple has a very lucrative model there, where they take as much as a 30% commission for purchases made. And really, the developments we're seeing are that courts and regulators are coming along and saying, maybe this is too high. Maybe we will allow developers to contact their customers directly, offer them alternative payment methods, and therefore bypass Apple's commissions.
So, bottom line is the regulatory headwinds we think are emerging, the wind of change is blowing, it's not going to impact Apple's profitability near-term. But you can see where our attention is focused
- Vitali, always a pleasure great insight. Thanks so much.
- Thanks, Kim.
[MUSIC PLAYING]
Vitali Mossounov is Portfolio Manager for the TD Global Technology Leaders ETF. He joins us now. Vitali, it's been a while. It's great to talk to you. And I'm going to jump right in. You have brought a bunch of really interesting charts for us to take a look at. And I want to bring up the first one, and this is a look at share performance of tech shares versus the S&P. Tell me why this is interesting to you.
- Well, this is an interesting perspective that I think is worth sharing. What we've done here is plotted the performance of the S&P 500. So the so-called market against the S&P 500 technology stocks, so the tech sector. And we've indexed it to a date that's now in the history books. And that's November 9, 2020, the infamous Pfizer vaccine announcement. It's been 11 months since and what we're trying to demonstrate here is the real tug of war, as you said in your comments, between the tech sector and the rest of the market.
Periods of intense outperformance, periods of intense underperformance, but guess what? 11 months later we're at the same point. So, both of these the market and the tech sector, up 28%. To me, the message there is that there's a certain sustainability there about technology stocks. What I mean is that in a year, when there's inflation concerns, rates are rising, technology stocks have still been powering through. And that's an important takeaway for investors.
- It really is. And I mean, there's the investment thesis, there's also just the basic business thesis, the technologies and everything in demand is going up, no matter what direction we're going in. You've got another chart here, which I think is interesting, which is a look at earnings estimates. And again, this is comparing earnings estimates for technology companies versus non-tech. Tell me what's here. Because we do look at it and I see that the tech earnings are lower, but I'm assuming this is a bit of a growth story too. They tend to lag.
- Well, you caught me there. I tend to bring more promotional charts for tech, call it. But in this case, what's important to highlight, is actually it's been a year of anomalies. And so let me take a step back. What are we showing here? We're looking back all the way to June 2020. It seems like years ago, but only 15 months. And this was when the market was really at its trough of earnings expectations.
Things really-- people couldn't expect things to get worse. And from there, these 2021 earnings estimates that we're showing have just been rising for tech stocks and non-tech stocks. And what we're showing here is that while expectations for tech earnings have improved quite a bit-- they're are about 50% higher if you look closely-- expectations for non-tech stocks have done even better. The fundamentals there have been even stronger.
This is actually highly unusual. Tech stocks tend to have better fundamentals year in and year out. And so, to me, it's another signal that says, hey even in a year when tech hasn't been able to put up the same earnings growth and match the growth in the rest of the market, the share prices have kept up.
- Fascinating. OK, well let's go to this next one, which builds on what you just said. You know, the earnings look to be lagging a bit, but to your point, the stocks are keeping up. If we look at this chart coming up, they've more than kept up in terms of share appreciation. What do you see here?
- Well, this chart does put into perspective. You know, sometimes the question is, hey, we've seen non-tech stocks really have better fundamentals. They're cheaper than tech stocks. Shouldn't we just own these other sectors? And my response is always, well, do you think that the next 10 years are likely to be anything like the last 10 years? And the chart you have up on the screen right now is the last 10 years of fundamentals, the last 10 years of earnings growth. Again, for the market, and for tech we've indexed it to 100 back in September 2011.
And what you see here is a very, very clear story. The market stream of earnings has doubled in the last 10 years. That's great. Earnings doubling in 10 years, we'll take that. But the stream of earnings that technology companies generate has tripled. And so, even if you pay a premium for these companies, these superior fundamentals, they make it worth your while. If you think the next 10 years are going to mimic the chart you're seeing right now, then tech stocks are very, very well worth your time.
- I've only got about 30 seconds, Vitali, but I do want to touch on one of your largest single holdings in the ETF, Apple. What's your take on where they are and where they're going with their newest iPhones just out?
- Well the newest iPhone, not much of a surprise to anyone. Very incremental changes announced two weeks ago. So, you're not going to get fireworks. Don't expect any. But we think that there's a very large billion user install base with rather old phones. There's big promotions that Apple is pushing. So they should be able to keep that franchise going nicely. The bigger development is there's been a lot of regulatory developments in court and from regulators.
And the issue here comes down to Apple's app store. That's 15% of their profits. And Apple has a very lucrative model there, where they take as much as a 30% commission for purchases made. And really, the developments we're seeing are that courts and regulators are coming along and saying, maybe this is too high. Maybe we will allow developers to contact their customers directly, offer them alternative payment methods, and therefore bypass Apple's commissions.
So, bottom line is the regulatory headwinds we think are emerging, the wind of change is blowing, it's not going to impact Apple's profitability near-term. But you can see where our attention is focused
- Vitali, always a pleasure great insight. Thanks so much.
- Thanks, Kim.
[MUSIC PLAYING]
