Technology sector helping US market to outperform during COVID-19

Technology sector US share market outperform COVID-19 FAANG stocks Atlassian

The United States continues to outperform the rest of the world with its rate of COVID-19 infections and deaths, which is hardly a badge of honour.

So, it is fairly counter-intuitive that the US share market has also been soundly outperforming our own – even as the economic damage in the US broadens dramatically, with unemployment looking set to crack through 25% amid an opening up of the economy even before the virus cases begin to taper off.

If you go searching for reasons why the US share market has continued to perform so well the answer can be summed up in one word – technology.

Big tech stocks dominate the US bourse

Unlike Australia’s small but nevertheless still booming technology stocks which make up just 3.7% or the ASX 200 index, tech stocks make up an impressive 25% of the US S&P 500.

Much of that percentage is made up of the so called “FAANG” stocks (Facebook, Apple, Amazon, Netflix and Google) which are absolutely global in scale and revenue, which by itself is an explanation of why the US market is much less tied to US economic performance.

There are literally hundreds of other technology stocks listed and otherwise in the US from household names like Tesla and Twitter to tiny start-ups and taken together they help to explain the massive disconnect between the US economy and the performance of its share market.

Atlassian would be a giant in Australia

Even the “one that got away’’ – Australian formed and Sydney based team collaboration software company Atlassian – has grown enormously.

Only started in 2002 by University of Sydney mates Mike Cannon-Brookes and Scott Farquhar, Atlassian was finally listed on NASDAQ at the end of 2015 for $6.7 billion and even after the COVID-19 market crunch is still worth an impressive $65.9 billion.

That means if Atlassian were listed here – which its current valuation and growth rate shows would have been a big mistake – it would have slotted in as our fifth biggest company, with a larger market capitalisation than all of the big banks bar Commonwealth Bank (ASX: CBA).

And that’s for a relatively niche software company which largely markets itself on the internet and through word of mouth.

Technology is outperforming

It is these technology companies both large and small that have been leading the US stock market higher, outperforming the broader indexes with a 42% rise since the COVID-19 inspired March lows.

There are a number of reasons for this outperformance but the main one is that this crisis showed how superior technology companies were at coping with a pandemic and how they will continue to thrive once the pandemic is over.

While many local papers in Australia stopped printing due to a collapse in advertising revenue during the pandemic, the flow of Australian advertising cash continued to the big technology companies such as Google, without anyone in the Googleplex in Mountain View, California having to lift a finger.

The flow of cash may have diminished somewhat but it only stands to benefit from the added exposure of millions of extra eyeballs from workers in various stages of lockdown around the world.

Online shopping and online advertising solid trends

Similarly, online shopping has gained impressive exposure during the pandemic, even as physical stores were either closed down or limiting foot traffic.

That is not to say that the pandemic did not hit the technology stocks – in varying ways it did – but most of the technology stocks both large and small will benefit from the changed behaviour the pandemic caused as the shift to online services and shopping continues to gather pace.

That’s why the technology heavy NASDAQ index is actually up for the year so far and the broader S&P500 is an amazing 10% closer to its record high than the ASX 200 is.

Australian index is heavy with banks and other losers

Apart from our relative lack of technology stocks, the Australian market is heavy with banks, insurers, energy stocks and property trusts which were hit hard by the pandemic and have been slow to recover.

We may have a few firecrackers such as Afterpay (ASX: APT) which has almost multiplied its market capitalisation five times and has hit an all-time record since it bottomed out on March 26, but we have too few technology stocks to push the index too far and too many traditional financial and other stocks that are holding it back.

If there is one thing that all Australian investors should have learned from the pandemic and the divergence between our market and those overseas, it is that having a home market bias can be a very expensive investment mistake.

Home market bias is costly

Solely from a diversification point of view, there are entire sectors that are much better represented offshore and have a lot of growth to offer compared to the opportunities available in Australia.

Even our small technology sector is one that should not be overlooked by local investors, despite the sort of price volatility shown by stocks like Afterpay.

Indeed, it could be argued that on diversification grounds alone you should hold fewer local stocks than offshore, although Australia’s dividend imputation scheme and generally higher dividend yields mitigates against such a strategy.

It is not even very hard to invest offshore now with a wide range of ETF’s (exchange traded funds) and active funds to choose from the construct a truly global portfolio.

Even a “dumb’’ ETF over the S&P 500 such as iShares (ASX: IVV) gives a very meaningful exposure to technology through the large representation on that index.

More concentrated technology exposure is also available through Betashares Nasdaq ETF (ASX: NDQ) and locally through the Betashares technology ETF (ASX: ATEC), to name just a few.