Since the beginning of 2020, one investment sector has stood out globally through all the Covid-19 pandemic induced volatility in markets, economies and industries – that of the Information and Communications Technology (ICT). Same is true over the last five-year period:
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S&P 500 Sub-Indexes 5-Yr annualized 3-Yr annualized Year-to-Date*
performance performance Performance
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Information Technology (Sector) (TR) 26.66% 28.59% 32.47%
Consumer Discretionary (Sector) (TR) 16.96% 21.59% 28.73%
Health Care (Sector) (TR) 11.75% 11.78% 7.80%
S&P 500 Index 11.53% 10.97% 7.63%
Utilities (Sector) (TR) 11.53% 9.62% 0.78%
Materials (Sector) (TR) 10.92% 7.08% 10.21%
Industrials (Sector) (TR) 10.36% 5.86% 0.65%
Communication Services (Sector) (TR) 10.32% 10.01% 10.58%
Consumer Staples (Sector) (TR) 8.94% 10.17% 6.84%
Financials (Sector) (TR) 8.29% 0.91% -16.36%
Real Estate (Sector) (TR) 7.96% 8.07% -2.45%
Energy (Sector) (TR) -11.27% -19.61% -46.68%
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*From January 01 till October 09, 2020 Source: S&P.
The size of global information technology market is forecast at $5.2 trillion in 2020, according to the research consultancy, International Data Corporation (IDC). To put this in perspective, this is around twenty times Pakistan’s GDP. If Pakistan is able to obtain just 0.1 percent of this rapidly growing market, it would translate into US$ 5.2 billion of export earnings per year.
It is no coincidence that in the latest reconstitution of the Dow Jones Index in August 2020, the oil/energy giant Exxonmobil, which was included in the DJI in 1928 (92 years ago), along with Pfizer (pharma) and Raytheon Technologies (aerospace & defence), were replaced by Salesforce.com (cloud computing & CRM solutions), Amgen (bio-technology & genetics) and Honeywell International (aerospace, software & automation solutions). On a broader level, the energy sector today makes up around 2.5% of the S&P 500 Index versus nearly 11% ten years ago, while the weight of the Technology sector has increased from18.5% of the Index in 2010 to over 28% today.
Information and communications technology has now become the bedrock of modern civilization and an indispensable tool for individuals, businesses and governments. It would not be an exaggeration to say that today and going forward, the most valuable resource is data. Indeed, we are now in the ‘age of information’. In this context, the highest growth sectors are and will continue to be those related directly and indirectly with information and communications technology (ICT). Whether it is the smart phone in your hand with increasing capabilities, or streaming videos on 5G platforms, Software as a Service (SaaS), the Internet of Things (IoT), or artificial intelligence (AI) driven image recognition, autonomous vehicles, robotics, drones & advanced satellites, biotechnology, or fintech – these are all ICT driven and, the growth of this sector will be enormous going forward.
The Covid-19 pandemic has accelerated digitization around the world. According to various research estimates, increase in digitization at consumer, commerce, finance and industry levels has been achieved in just six months due to work-from-home and other measures taken by governments, companies and individuals from what would have normally taken three years.
Growth – of existing and new markets, revenue sources, margins and cashflows – is a key driver of stock prices and investment returns. The global ICT technology sector offers perhaps the greatest high growth potential than any other sector. So even though domestically there are few venues for investing in the ICT sector at present, it is worth knowing what is happening on the technology front and developing a degree of understanding regarding its investment landscape. For those who are interested and able to participate in global markets we hope this brief review will be especially useful. Of course, as with all investments, risk & returns must be carefully weighed according to one’s risk tolerance level and advice sought from accredited finance / investment professionals, as past returns are no guarantee of future investment performance.
IDC divides the global ICT sector into telecom segment (26%); devices and infrastructure (23%); IT and Business Services (21%); Emerging Technologies (17%); and Software (12%). The top five market regions are, the U.S. (32%), Europe (20%) and China (14%), South East Asia (11%) and Japan (7%).
Information and Communications Technology is a vast landscape and to get a grip on it we need to break it down into segments. One way to do this is by creating two major categories, Hardware and Software. At a very broad level the hardware category can be further divided as follows, although this is by no means an exhaustive list:
HARDWARE
Semi-conductors & equipment
Computer hardware & peripherals
Electronic equipment & components
Smart Phones
Communications equipment
Consumer Electronics
Robotics Technology
We can view the above segments as a starting point in furthering our understanding of the information and communications technology sector and related investment implications. Following is a brief overview of each of these segments, starting with the hardware category.
Semi-conductors & Equipment
What is a semiconductor? A semiconductor material has an electrical conductivity value falling between that of a conductor, such as metallic copper, and an insulator, such as glass. Some examples of semiconductors are silicon and germanium. By adding a very small of impurity (also called dopant) to the semi-conductor, its electrical conductivity can be modified for specific purposes by introducing a sensitivity to heat or light, or altering conductivity based on the direction of the current. Semiconductors, commonly called ‘chips’ can be found in most electronic devices such as computers, smartphones, entertainment & gaming hardware, medical equipment, certain household appliances such as washing machines & air conditioners, office equipment as well as automated manufacturing, industrial and communication equipment, etc.
Microprocessors (logic Integrated Circuits) are the central component of all electronic devices. Memory chips can be DRAM (dynamic random access memory) which does not retain information when the electric current is turned off, and NAND (“not and”) which retains information without power. DRAM is common for computers while NAND is common in consumer electronics like mobile phones and MP3 players.
According to Statista, global semiconductor sales are expected to reach US$433 billion in 2020. Some of the largest semiconductor chip manufactures include Intel Corp, TSM, Qualcomm, Micron Technology Inc, Texas Instruments, NVIDIA, among others.
Computer Hardware and Peripherals
The computer hardware market consists of sales of computer hardware including digital equipment, such as personal computers (PCs) laptops and tablets and the components which make these up (Monitor, Motherboard, CPU Microprocessor, Main memory(RAM) Power supply unit, Optical disc drive, Hard disk drive (HDD)) computer storage devices, servers and processors, peripheral equipment (keyboards, printers, scanners, disk drives, etc.), data centre equipment, system design services and related services. This is very wide market. As per Computer Hardware Global Market Report 2020-30, this market is estimated at US$897 billion in 2020 and forecast to exceed US$ 1.0 trillion by 2023.
Major companies in this segment include Apple, Asus TeK, Acer, Compal, Dell, Fujitsu, Hon Hai Precision (Foxconn), HP, Intel, Jabil Circuit, Lenovo, LG, Oracle, Panasonic, Quanta, Samsung, Sony, Western Digital and others.
Electronic Equipment & Components
Electronic components are the devices that work within an electronic system to have an effect on their associated fields. These components have electrical terminals connected to form an electronic circuit with a particular function such as amplifier or oscillator. Rising demand for microwave tubes, cathode-ray tubes, X-ray tubes, photoelectric tubes and triodes in LCD and display devices iis expected to drive usage of electronic components as are various applications in satellite and space technology, automotive, defence sector besides PC monitors, laptops, smartphones, and internet of things (IoT) applications.
IoT provides communication and connection between various devices such as fitness watches, smartphones, and smart meters. General electronic components such as resistors, transistors, capacitors, and diodes are used in making smart devices, sensors, and actuators that can interconnect with each other. The IoT market is experiencing huge growth. According to Gartner Inc., IoT devices in use are estimated at 20.4 billion in 2020 while Juniper Research forecasts that this will rise to 38 billion in 2025.
The global general electronic components market is estimated at $373.7 billion in 2019 and expected to grow at a CAGR of 8.59% and reach $519.6 billion by 2023, according to the Business Research Company.
Major players in the electronic equipment market are Fairchild Semiconductor, Vishay Intertechnology, STMicroelectronics, Texas Instruments, Toshiba, Panasonic Corporation, Hitachi, and Infineon Technologies, amongst others.
(The writer is the former Managing Director of Pakistan Stock Exchange. The views expressed in this article are not necessarily those of the newspaper. According to the writer, the companies noted in this article are for information purposes only and used simply as examples. This is not a solicitation to buy or sell any security or company mentioned herein. Except for a small investment (US$4,000/=) in an ETF (IYW), the writer does not own stock in companies noted herein. Forward-looking statements should not be considered as guarantees or predictions of future events. Data provided in the article is from publicly available third-party sources, however its accuracy is not guaranteed and the data should be treated merely as indicative. Anyone interested in finding about investment opportunities should conduct their own research and due diligence within the guidelines of their respective jurisdictions and through authorised investment professionals. Potential interested readers should note that past performance is no assurance of future performance of an investment and the value of any investment may become worth more or less than the original invested amount).
Copyright Business Recorder, 2020
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