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 17, 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 14, 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 14, 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 15, 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 14, 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

Clime time: Asset allocation decisions for SMSFs

The 60/40 Portfolio – saying bye to old friends and welcoming new ones

The attacking defender: position for downturns with private debt

banner

Most viewed in recent weeks

2024/25 super thresholds – key changes and implications

The ATO has released all the superannuation rates and thresholds that will apply from 1 July 2024. Here's what’s changing and what’s not, and some key considerations and opportunities in the lead up to 30 June and beyond.

Five months on from cancer diagnosis

Life has radically shifted with my brain cancer, and I don’t know if it will ever be the same again. After decades of writing and a dozen years with Firstlinks, I still want to contribute, but exactly how and when I do that is unclear.

Is Australia ready for its population growth over the next decade?

Australia will have 3.7 million more people in a decade's time, though the growth won't be evenly distributed. Over 85s will see the fastest growth, while the number of younger people will barely rise. 

Welcome to Firstlinks Edition 552 with weekend update

Being rich is having a high-paying job and accumulating fancy houses and cars, while being wealthy is owning assets that provide passive income, as well as freedom and flexibility. Knowing the difference can reframe your life.

  • 21 March 2024

Why LICs may be close to bottoming

Investor disgust, consolidation, de-listings, price discounts, activist investors entering - it’s what typically happens at business cycle troughs, and it’s happening to LICs now. That may present a potential opportunity.

The public servants demanding $3m super tax exemption

The $3 million super tax will capture retired, and soon to retire, public servants and politicians who are members of defined benefit superannuation schemes. Lobbying efforts for exemptions to the tax are intensifying.

Latest Updates

Retirement

Uncomfortable truths: The real cost of living in retirement

How useful are the retirement savings and spending targets put out by various groups such as ASFA? Not very, and it's reducing the ability of ordinary retirees to fully understand their retirement income options.

Shares

On the virtue of owning wonderful businesses like CBA

The US market has pummelled Australia's over the past 16 years and for good reason: it has some incredible businesses. Australia does too, but if you want to enjoy US-type returns, you need to know where to look.

Investment strategies

Why bank hybrids are being priced at a premium

As long as the banks have no desire to pay up for term deposit funding - which looks likely for a while yet - investors will continue to pay a premium for the higher yielding, but riskier hybrid instrument.

Investment strategies

The Magnificent Seven's dominance poses ever-growing risks

The rise of the Magnificent Seven and their large weighting in US indices has led to debate about concentration risk in markets. Whatever your view, the crowding into these stocks poses several challenges for global investors.

Strategy

Wealth is more than a number

Money can bolster our joy in real ways. However, if we relentlessly chase wealth at the expense of other facets of well-being, history and science both teach us that it will lead to a hollowing out of life.

The copper bull market may have years to run

The copper market is barrelling towards a significant deficit and price surge over the next few decades that investors should not discount when looking at the potential for artificial intelligence and renewable energy.

Property

Global REITs are on sale

Global REITs have been out of favour for some time. While office remains a concern, the rest of the sector is in good shape and offers compelling value, with many REITs trading below underlying asset replacement costs.

Sponsors

Alliances

© 2024 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. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. 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.