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Investing in technology – a digital transformation?

We take a look at some of the latest trends emerging in the technology sector and the interesting investing opportunities that could come with them.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

It’s estimated that around $3.6 trillion was spent on information and technology (IT) in 2020, and that’s expected to increase by roughly 6% in 2021. This shouldn’t come as much of surprise as coronavirus has led to a surge in demand for all things tech.

In a matter of months, coronavirus accelerated the digital transformation trend by several years. Companies have either adopted existing technology or developed and trialled new technology to allow them to continue to trade despite the virus.

As a result, we’ve seen several trends emerging in the technology sector. These trends could offer investors some interesting opportunities.

This article isn’t personal advice. Investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment or course of action is right for you, seek financial advice.

Working from home

When the virus took hold in March last year, offices were forced to close, meaning businesses had to quickly adapt to remote working.

Companies that offered remote working services naturally saw increased demand. Zoom and Microsoft, for example, provide video platforms that meant business meetings and interviews could carry on virtually. Cloud-based security companies also benefited as remote working raises the risk of security threats. Cyber protection services were in high demand to help safeguard internal systems and client information.

Companies offering communication and entertainment services, like Disney and Netflix, also saw more demand for their services as people spent more time at home.

There are questions about how sustainable all this new demand is though. We might see a greater focus on working from home going forward due to its success for so many so far. But as more people start returning to offices and spend less time at home, demand for these services could also dry up.

E-commerce

As shops were shut down, people have shifted their purchases online to meet their shopping needs. Unsurprisingly, food delivery services have been busier. More people than ever have managed to order, pay for and receive goods from the safety and comfort of their own homes.

Companies that already had a strong online presence have done well during lockdowns, like Amazon and Alibaba. Increases in online transactions also provided an opportunity for digital payment providers, like Paypal and Visa Inc, to benefit from the shift to cashless payments.

Buying more online rather than in person could remain popular after the pandemic eases. But it could also be hindered slightly in the short term as we come out of lockdowns. UK household savings rose to record highs last year, as restrictions limited spending opportunities. As businesses reopen, people are likely to spend these savings on things they haven’t been able to, like going to the cinema or eating in a restaurant rather than ordering a takeaway online.

Digital health

Over the past year, the healthcare sector has had to rapidly change in a difficult environment, including the transformation of digital health technologies. More administrative healthcare processes, like switching doctors, ordering prescriptions and routine check-ups have transitioned online.

Artificial intelligence (AI) and robotics technologies have also been introduced to help streamline parts of the healthcare sector. They’ve been used to sanitise buildings and eliminate hospital viruses with ultraviolet beams, while also assisting in the development of vaccines and treatments.

Patients have started to see the value in digital health. But there are still concerns about using it for some, particularly around the security of confidential information online.

How’s the tech sector performed?

Over the past 12 months, the FTSE World Technology index has performed well, returning 56.0%* compared to the broader global stock market’s gain of 39.9%. This has been boosted by the surge in demand for online and internet-based services.

But the strong performance isn’t just a flash in the pan type event. The sector’s done well over the long term too. Over the last 10 years, the FTSE World Technology index has grown 557.3%, compared with the broader global stock market which grew 200.5%.

Remember though, past performance isn’t a guide to future returns, and there are no guarantees this will continue.

10 year performance of the techonolgy sector vs the global stock market

Past performance is not a guide to the future. Source: *Lipper IM to 31/03/2021

Different sectors perform well at different times. The technology sector can be volatile, at times it’ll fall behind and performance will struggle. The dot-com boom and bust is a perfect example.

More recently, while technology stocks rallied in 2020, they’ve not performed as well as the broader global stock market in 2021 although this is a short time period to consider. Growing inflation expectations have led to fears of interest rate hikes in future. This can be harmful for stocks that are expected to grow a lot in the future as the present value of their future profits are worth less today.

There are other risks too.

New or early stage technology companies tend to fall by the wayside, either through high start-up costs or from competition from larger rivals and high barriers to entering the market.

Investing in specialist areas, like technology, has its risks and we think it should only form a small part of any portfolio. Investors should take a long-term view, by long term we mean at least five years.

Any investment you make should also be as part of a well-diversified investment portfolio.

Diversification – the investor’s tool we all need to talk about

Investment ideas for investing in technology

Investing in funds and investment trusts isn’t right for everyone. Investors should only invest if the investment’s objectives are aligned with their own and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund or investment trust before they invest and make sure any new investment forms part of a diversified portfolio.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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