In a year that equity markets around the globe have powered unrelentingly higher, it is tech stocks which are the standout stars.
While the MSCI World Information Technology Index has beaten the wider MSCI World Index in every year since 2013, it’s this year the gap between the two have diverged most. As at 31 October, the IT Index had returned 36.71% since the turn of the year compared to the MSCI World’s 18.21%.
The US and Asia have been the leaders in the tech outperformance thanks to the FANGs – Facebook (FB), Amazon (AMZN), Netflix (NFLX) and Google (GOOGL) – and the BATs – Baidu (BIDU), Alibaba (BABA) and Tencent (00700).
NASDAQ, which houses the FANGs, has gained 27% year-to-date compared to the S&P 500’s 18%; the NASDAQ 100 Tech Index is up 36%. The MSCI AC Asia IT sector, of which the BATs account for over a quarter, has gained 56% compared to the wider index’s 29%.
It’s a similar story in Europe, with the STOXX Europe 600 technology index up 26.2% as at 31 October compared to the wider market’s 12.7%. However, while the region is in favour with many commentators, its tech sector has largely been neglected in discussions.
Tim Stevenson, manager of the £252 million Henderson EuroTrust (HNE), says many people think Europe has no technology stocks, but that “couldn’t be further from the truth. In fact, many are world leaders in their field, he explains.
Henderson EuroTrust is overweight tech relative to its benchmark and Stevenson says he’s trying to invest in companies that have technological leadership on a worldwide basis.
“It’s brilliant marketing by the Americans to make people think that only American companies are actually the technology leaders,” he says. “Sure, they’ve got the FANGs – terrific, hats off to them. But there’s actually a whole lot of stuff behind those which is just as interesting.”
German software firm SAP (SAP) is the fourth-largest holding in the EuroTrust and Stevenson says it’s “head and shoulders ahead” of many of its peer from around the world because of the amount they have invested in the cloud and other systems.
“SAP is not just gaining share in Europe, but worldwide,” he continues. The share price is up 65.5% over the past three years. “It’s been a tremendously successful investment for us.”
He also likes fellow German-listed company Infineon (IFX), which has almost trebled in value since December 2014. Infineon currently makes 38% of the chips used in electric vehicles worldwide. This is a growth area due to the automotive industry’s enforced move away from the internal combustion engine.
Amadeus (AMS), the Madrid-listed IT services provider for the travel and tourism industry, is another Stevenson likes. It’s doubled in three years and has returned 41% year-to-date.
Both SAP and Infineon are rated two stars by Morningstar analysts and Amadeus one star, meaning all three are trading above their fair value estimates.
Francesco Conte, co-manager of the £669 million JPMorgan European Smaller Companies Trust (JESC), is another with a big overweight to tech. The sector accounts for almost a fifth of the portfolio. Conte agrees with Stevenson that tech doesn’t only revolve around the US scene.
Conte’s largest holding is TKH (TWEKA), a Dutch company that delivers systems and networks for telecoms, railway, healthcare organisations and many more. Conte is particularly excited about its innovative sensor solutions for car parks and railway operators.
Datalogic (DAL) is another he likes and sees 10% growth per year as its wares become more in-demand. It primarily makes the technology behind bar code readers and, while in the past its largest customers were bricks and mortar retailers, more firms are using them.
Online retailing is the biggest growth market, but postal companies like DHL are increasingly looking for scanners to track and trace deliveries.