Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 379

When defensive assets become indefensible, turn to tech

The appeal of owning traditional defensive assets of any type is currently less than in almost any other period in history. In fact, in this extremely low rate environment, we are seeing just how unattractive traditional defensive assets can become. 

But despite the serious headwinds facing defensive assets, investors started moving billions into these safe havens well before COVID-19 struck, as many feared equity markets were toppy and it was late in the economic cycle. This may have proven a saviour for some investors in March 2020.

A redefinition of what is defensive

In the flight to safety, many investors took their medicine even though the cash rate was at an historic low, term deposits above 1% were rare and incomes from investment grade bonds had plummeted. The riskier high yield bonds broadly tracked the share market which calls into question their raison d'être as they do not have the desired defensive qualities in a downturn.

With income generation previously a major drawcard for a defensive allocation, many investors have realised they can no longer rely on an income of 5-7% a year and are having to rethink their future. Or at least change their investment strategy.

It is time for investors to broaden their approach to defensive investing and take a closer look at defensive sectors, rather than just the asset class.

To look only at defensive asset classes is a narrow view of the investment universe. This fails to take into consideration one critical factor that impacts the success or failure of the underlying companies, and that is the sector in which they operate.

For those more sophisticated investors who already take a sector approach to portfolio construction, it may also be time to look outside the usual suspects of consumer staples, healthcare and utilities, where demand for these goods and services are relatively inelastic and as a result they perform relatively well in a downturn.

Technology has joined the defensive club

During this pandemic and early days of the economic recession, we are seeing a surprising new entrant to the defensive sector grouping. Technology shares have been behaving a lot like defensive shares such as food and utilities.

The S&P/ASX 200 is down 12.6% since February 2020, while the S&P ASX All Technology Index, a broad index of technology companies, is up 30%. Over the same period, the S&P500 is up nearly 8%, while the NASDAQ, the home of many technology companies, is up over 25%. This is not a fluke. See the chart below for a comparison between the NASDAQ, S&P 500, and DJIA.

DJIA v S&P 500 v NASDAQ

Source: S&P Global

Technology is holding its own and providing investors with a defensive position in this time of great uncertainty, with the NASDAQ fuelled by the strong revenues and forecast growth rates of many of its technology companies.

The reasons are plain to see, not least because technology has been the lifeline for individuals and businesses during lockdown. In the US, a recent Fortune 500 CEO poll found that 75% of companies plan to increase spending on technology.

So while the NASDAQ suffered a fall in September due to investors reducing their valuations for companies such as Apple and Tesla, and further exacerbated by the number of equity derivates involving both retail investors and SoftBank, the index has stabilised (and recovered) recently. Their traditionally higher valuations can be attributed to drivers such as high margins, growth rates and their ability to be agile in adapting to consumer and businesses changes caused by COVID-19.

History has proven that technology thrives on shocks. These are events that are, by and large, unexpected and bring out changes in real economic growth, inflation and unemployment.

There has been no greater shock in a generation than COVID-19. This is a shock that will have lasting effects and technology will exacerbate the impact on certain sectors and force changes that allow businesses to survive. COVID-19 has accelerated innovation in sectors including ecommerce, cloud computing, gaming, streaming and remote communication such as videoconferencing.

Technology is a deflationary force

Investments in technology by companies are made to reduce costs, increase profits and improve efficiencies. It is difficult to imagine that any business will reject technology that enables them to produce more product, more quickly and ultimately make larger profits.

Investors are already shifting away from the today’s sunset industries and hedging with investments in technology. As a resource economy, it has been difficult to avoid investing in large mining companies but the shape of our economy is changing. Some commentators have suggested that COVID-19 has hastened the slow passing of the oil age and is driving an increasing focus on sustainability generally. Technology drives this sustainability.

Investors taking stock of tech opportunities

Investors will undoubtedly be taking stock and assessing their investment portfolio as the world waits and watches to see what happens next in these strange times. With tech shares currently trading at high multiples, we can expect investors will look across the spectrum of tech investment opportunities. Venture capital funds are sought after as investors seek exposure to early stage tech businesses in what is ultimately a long-term game plan.

Technology has never been more important. This holds true in daily lives, in business and in the global economic recovery. When times are tough, corporates slash procurement costs, automate procedures and optimise back-office efficiencies. Technology delivers on all of these fronts. In better times, we can expect to see high growth tech businesses continuing to innovate and bring new products to consumers and business.

With a greater focus on defensive sectors rather than poor-performing defensive asset classes, investors may just be able to have their cake and eat it. A strategy that is both high growth yet defensive, supporting economic recovery and creating an economy of the future.

 

Benjamin Chong is a partner at venture capital firm Right Click Capital, investors in high-growth technology startups. This article is general information and does not consider the circumstances of any investor.

 

5 Comments
Trevor
October 18, 2020

This honestly reads like a VC sales pitch and is a poorly thought out thesis about defensiveness being intrinsic, whereas it is so more likely incidental. Tech is not intrinsically defensive, it was incidentally defensive because of the particular circumstances created by this very particular crisis. The pandemic itself was tech friendly, retail investor mania has fuelled their price growth called and cheap money and MMT has been highly supportive of the sector. If you are relying on money printing, low rates, retail mania and everyone locked up at home for a stock to be defensive, than good luck in the next crisis, which will have its own flavour. Let's see how these stocks fare in a crisis induced by taking the foot off the monetary pedal or indeed anything that hits momentum.

Vince
October 15, 2020

Technology is the future and the future is here. The dot com bust in 2000 happened in my view, because tech wasn’t yet mature. Just look around and you can see technology is entrenched in just about everything we do. However, there will be winners and losers. That’s just natural.

Brett
October 15, 2020

It's one thing to explain the benefits of a sector, like Tech. To claim this sector is a defensive by handpicking one example to make your point is concerning. Tech in 2000 underperformed; tech underperformed the initial recovery from the GFC - it all depends on the circumstances (a pandemic forcing people to stay home is obviously tech friendly).

Tech investments, to use your examples Apple and Telsa, sell products that are non-essential. Therefore, at some point in the future the earnings of these companies will likely act in a non-defensive manner. Utilities and healthcare are essential items that have provided relatively more stable earnings profiles.

I'm not discounting your ability to pick great investments within the sector. I disagree with your claim that the entire sector is a defensive asset.

Brendan
October 16, 2020

Couldn’t agree more. Well said.
The article read more like a sales brochure than analysis.
Be good at what you do, but don’t pretend you’re something you’re not.

Alex
October 15, 2020

Never thought I'd see the day when growth stocks with P/E north of 30 were called defensive. May they grow forever, or until they are themselves disrupted. TikTok anyone?

 

Leave a Comment:

     

RELATED ARTICLES

The attacking defender: position for downturns with private debt

Let’s clarify growth/defensive and move forward

The 60:40 portfolio ... if no longer appropriate, then what is?

banner

Most viewed in recent weeks

House prices surge but falls are common and coming

We tend to forget that house prices often fall. Direct lending controls are more effective than rate rises because macroprudential limits affect the volume of money for housing leaving business rates untouched.

Survey responses on pension eligibility for wealthy homeowners

The survey drew a fantastic 2,000 responses with over 1,000 comments and polar opposite views on what is good policy. Do most people believe the home should be in the age pension asset test, and what do they say?

100 Aussies: five charts on who earns, pays and owns

Any policy decision needs to recognise who is affected by a change. It pays to check the data on who pays taxes, who owns assets and who earns the income to ensure an equitable and efficient outcome.

Three good comments from the pension asset test article

With articles on the pensions assets test read about 40,000 times, 3,500 survey responses and thousands of comments, there was a lot of great reader participation. A few comments added extra insights.

The sorry saga of housing affordability and ownership

It is hard to think of any area of widespread public concern where the same policies have been pursued for so long, in the face of such incontrovertible evidence that they have failed to achieve their objectives.

Two strong themes and companies that will benefit

There are reasons to believe inflation will stay under control, and although we may see a slowing in the global economy, two companies should benefit from the themes of 'Stable Compounders' and 'Structural Winners'.

Latest Updates

Retirement

Stop treating the family home as a retirement sacred cow

The way home ownership relates to retirement income is rated a 'D', as in Distortion, Decumulation and Denial. For many, their home is their largest asset but it's least likely to be used for retirement income.

Property

Hey boomer, first home buyers and all the fuss

What is APRA worried about? Most mortgagees can easily absorb increases in interest rates without posing a systemic threat to the banking system. Housing lending is a relatively risk-free activity for banks.

Property

Residential Property Survey Q3 2021

Housing market sentiment has eased from record highs and confidence has ticked down as house price rises slow. Construction costs overtook lack of development sites as the biggest impediment for new housing.

Investment strategies

Personal finance is 80% personal and 20% finance

Understanding your own biases and behaviours is even more important than learning about markets. Overcome four major cognitive biases that may be sabotaging your investing and recognise them in others.

Where do stockmarket returns come from over time?

Cash flow statements differ from income statements and balance sheets, and every company must balance payments to investors versus investing into the business. Cash flows drive the value of the business.

Fixed interest

How to invest in the ‘reopening of Australia’ in bonds

As Sydney and Melbourne emerge from lockdown, there are some reopening trades in the Australian credit market which 'sophisticated' investors should consider as part of their fixed income portfolios.

Shares

10 trends reshaping the future of emerging markets

Demand for air travel, China’s growing middle-class population, Brazil’s digital payments take-up, Indian IPOs, and increased urbanisation are just some of the trends being seen in emerging economies.

Sponsors

Alliances

© 2021 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.

Website Development by Master Publisher.