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‘Techtonic’ shifts
The tech developments of the past decade are coming to fruition
From smartphones to electric cars, a new wave of technology is
going to change the investment landscape
Our analysts pick their favourite areas and companies
The next tech wave
Technological advance is always a major driver of
stock markets, albeit one that is very hard to
identify as an investor.
An investor who spotted correctly the three big tech
waves of the past 25 years – the rise of the PC, the
development of the internet and the growth of
smartphones and similar devices – could have
made wonderful returns. Similarly, by not spotting
that a technology was maturing (or by picking
eventual losers) returns would have been poor.
In the late 1980s and early 1990s stocks such as
Microsoft and Intel soared as PC demand took off,
but Microsoft today is still 50% below its 2000
peak (Chart 1). Internet stocks jumped during the
TMT bubble of 1998-2000. After it, some such as
Amazon rebounded strongly and created
sustainable businesses; others, such as Yahoo, lost
their way. More recently, emerging market internet
plays such as Baidu have also performed strongly.
The launch of Apple’s iPod in October 2001 and its
subsequent evolution into the iPhone and iPad
triggered growth in smartphone stocks. Apple’s
share price has risen 3400% over that time.
Technological advances move in waves, and it
seems to us that a number of the scientific
developments of the past decade (faster
semiconductors, internet commerce, alternative
energy, more efficient batteries) are all coming to
fruition together now. Next year looks like being
the year that smartphones really take off, with these
devices forecast to grow from 270m units in 2010
(20% of total handsets) to 527m in 2014 (32% of
the total). This will have repercussions for telecoms
operators and equipment makers, as well as
triggering new opportunities for internet-based
businesses. The rising price of commodities is
propelling the search for alternative energy sources,
and for substitutions (for example, aluminium for
copper, or growing use of plastics). Electric cars
are close to becoming commercially viable.
What is particularly exciting about these
developments is that technology-related sectors
are available very cheaply on global stock
markets. After the TMT bubble burst in 2000,
tech stocks underperformed massively (Chart 2).
But they also lagged in the 2003-07 bull market,
as investors preferred commodities and began to
doubt the long-term business model of many tech
companies (high capex, short product lifetimes,
excess competition).
Technology stocks have outperformed a little
since the current bull market began in April 2009,
but only by about 4%. This has left tech-related
growth sectors looking cheap relative to the
market. Where most such sectors have typically
traded at a big premium (Chart 3), currently
semiconductors and pharmaceuticals are on a
discount to the market, and even the premium of
the software sector is only 19%, compared to an
average premium of 51% in 2003-07
But which technologies?
Identifying the technologies that will take off over
the coming years (particularly those where this is
not yet fully appreciated by the market) and
picking the winners from these technologies is
obviously a bottom-up judgement. So we asked
HSBC’s analysts to point to technologies and
companies they see benefiting from the next tech
wave. Here is what they came up with.
Touchscreen technology will be a key
growth area in 2011 as iPads and other tablets
continue to grow in popularity. We think the
P-cap technology, used in iPhones and iPads,
will become the mainstream technology. TPK
(3673 TT, OW(V), TWD664, TP TWD850)
has 45-50% of market share with Apple.
Smart electricity grids, which control the
supply of power using two-way digital
communications. The UK’s National Grid
(NG/ LN, N, GBP5.68, TP GBP6.1) is well
placed in this technology, which should allow
it to become a market leader in transmission.
2011 will be the year the smartphone really
takes off. Industry projections expect 18%
CAGR in 2010-14. We prefer to take
exposure to this via sub-component and
semiconductor makers.
The growth of smartphones will also lead to a
big rise in demand for mobile data. The
capacity crunch this will produce will trigger
a significant increase in mobile telecoms
capex. We expect Ericsson (ERICB SS, OW,
SEK72.55, TP SEK95) and other telecoms
equipment vendors to benefit.
Further shifts of marketing dollars to the
internet. For example, credit and marketing
services provider Experian (EXPN LN, OW,
GBP7.35, TP GBP8.5) is launching additional
online marketing products such as email
marketing in emerging economies. Distributor
Electrocomponents (ECM.L, OW, 259p,
TP 325p) is increasingly shifting sales of
electronic products to a web-based platform.
The falling cost of solar energy means it is
approaching grid parity in key markets. But
excess capacity in some areas of the business,
means investors have to be choosy. We prefer
high-quality upstream polysilicon players
such as Wacker Chemie (WCH GY, OW(V),
EUR132.0, TP EUR175).
One focus of China’s next five-year plan is to
increase use of non-fossil fuels to 15% of
energy use by 2020. This demonstrates the
country’s determination to be a leader in the
clean energy field. As this is a crowded
sector, stockpicking is important. We like
China Everbright Int’l (257 HK, OW(V),
HKD4.34, TP HKD5.40), an energy
conglomerate, for its track record in waste
treatment and sensible diversification into
alternative energy.
As emerging market infrastructure improves,
high-tech products will sell for the first time.
One less obvious implication of this is that, as
China and India build out modern road
systems, transport firms will be able to use
heavy advanced trucks, rather than
underpowered flatbed trucks they typically
use now. The upfront costs of such trucks are
higher but their superior performance will
significantly boost productivity.
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