
Fisher Investments Canada reviews the tech sector
The information technology (IT) or “tech” sector receives widespread attention among financial publications we follow. That is no surprise to us, given it is world stocks’ largest sector, comprising roughly 22 per cent of global market capitalization (a measure of a company, sector or industry’s size calculated by multiplying share price by the number of outstanding shares).1 Moreover, we have found the sector includes some dynamic and widely touted companies that heavily influence our daily lives in the modern world. But in Fisher Investments Canada’s review, investors would do well to understand Tech isn’t homogeneous – industries within the sector have varied drivers.
Three key industries make up the majority of world tech.2 Software is the largest, comprising 32.6 per cent of the sector.3 Fisher Investments Canada has found firms within this industry specialize in cloud computing, personal computing, business process software (such as e-mail and word processing software), customer relationship management tools and other applications.
Semiconductors & semiconductor equipment comprises the second-largest slice at 28.5 per cent of global tech.4 Semiconductors – chips that include microscopic, etched wiring and electrical equipment – are a crucial component in a wide range of applications, from household appliances to cars to artificial intelligence (AI). These chips vary in complexity, particularly between specialized GPUs (graphics processing units), which enable advanced AI and video rendering, and more commoditized CPUs (central processing units), which handle simpler logic operations.5
Technology hardware, storage & peripherals is the third-biggest industry, making up 24.7 per cent of the sector, and includes companies that develop and produce an array of devices – including desktop computers, smartphones, printers and more.6 IT services (6.9 per cent), electronic equipment instruments & components (4.5 per cent) and communications equipment (2.9 per cent) round out the rest of the sector.7 We think it is also worth noting that some firms described as “big tech” by financial commentators Fisher Investments Canada reviews aren’t classified within tech – for example, some large social media companies fall under the communication services sector’s interactive media & services industry.8
Amongst the three largest tech industries Fisher Investments Canada reviews, research has found firms concentrate within various regions. America dominates all three industries by market capitalization – with U.S. firms comprising 87 per cent of world software industry market cap, 72 per cent of semiconductors & semiconductor equipment and 79 per cent of technology hardware, storage & peripherals.9 That said, investors can find select tech opportunities in other parts of the world, too. Germany, Canada and India comprise around 8 per cent of world software.10 Taiwan is 13 per cent of semiconductors & semiconductor equipment while the Netherlands and Japan total another 10.7 per cent of the industry’s market capitalization.11 South Korea, Taiwan and Japan total 17.4 per cent of technology hardware, storage & peripherals.12
Based on Fisher Investments Canada’s research, the tech sector is growth-oriented (composed largely of firms that typically reinvest profits in the business and trade at higher valuations, which are metrics comparing prices to fundamental measures like earnings). While all firms are subject to influence from economic conditions, we have found tech companies are less reliant on economic activity than most to deliver sales growth. Based on our research, they ride longer-term societal or economic trends – hence, tech can be attractive in a slower-growth economic environment. Yet we think there are some industry-specific nuances worth being aware of.
For example, while we have found relatively large gross operating profit margins (GOPMs, total revenue minus cost of goods sold) fuel reinvestment for all tech, software’s 55.9 per cent is greater than its tech peers.13 We have found those relatively larger margins offer a greater buffer if costs are rising and/or demand falls – suggesting the economic cycle has relatively less sway over software than other tech industries. Compare that to tech hardware (and its 27.5 per cent GOPMs), which we think depends more on consumer and enterprise demand – so if the economy is in a downturn and businesses are tightening their belts, that may present more of a headwind for the industry.14 In contrast, Fisher Investments Canada has found semiconductor & semiconductor equipment drivers are cyclical, and the industry rotates in and out of favour as technological advancements emerge – think the new introduction of new technology (such as AI driving GPUs) or PC replacement as newer models become available. We think investors interested in semiconductors benefit by monitoring chip supply in particular, as our research shows it can take years to bring foundries online for chip production.
In Fisher Investments Canada’s view, investors seeking tech for their portfolios may therefore benefit from buying within different industries – based on various economic and market conditions – while considering which regions offer industry-level exposure (or lack thereof) for diversification. If in a late bull market (a prolonged period of broadly rising stocks), we think investors may benefit from seeking growth-oriented tech overall – while focusing on software in particular. Relatedly, investors may benefit from focusing less on Japan and South Korea (given these countries’ hardware industry skew) and more on the U.S., Germany, Taiwan and the Netherlands.15 If you expect big AI breakthroughs, looking into semiconductors may make sense, in Fisher Investments Canada’s review – focusing on GPUs in the U.S., Taiwan and the Netherlands.16 Or, if economic conditions point to rapid business expansion, we think it can be beneficial to consider hardware – seeking U.S., South Korean, Taiwanese and Japanese firms – as businesses make one-off tech equipment purchases and consumers seek the newest gadgets.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.
Fisher Investments Management, LLC does business under this name in Ontario and Newfoundland & Labrador. In all other provinces, Fisher Asset Management, LLC does business as Fisher Investments Canada and as Fisher Investments.
1 Source: FactSet, as of 12/9/2023. MSCI AC World Index, Information Technology sector.
2 Ibid.
3 Ibid.
4 Ibid.
5 “Introduction to Semiconductors,” AMD, as of 12/9/2023.
6 Source: FactSet, as of 12/9/2023. MSCI AC World Index, Information Technology sector.
7 Ibid.
8 Source: FactSet, as of 14/9/2023. MSCI AC World Index, Communication Services sector.
9 Source: FactSet, as of 12/9/2023. MSCI AC World Index, Information Technology sector.
10 Ibid.
11 Ibid.
12 Ibid.
13 Ibid.
14 Ibid.
15 Ibid.
16 Ibid.
Advertising feature produced by Fisher Investments Canada. The Globe’s editorial department was not involved.
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