The tech sector may be one of the biggest question marks in the New Year.
Apple ( AAPL) surprised investors by announcing that holiday quarter revenues from 2018 would fall short of expectations, primarily from weak iPhone sales in China.
“Technology stocks are pausing after years of stellar growth,” says David Russell, vice president of content strategy at trading platform TradeStation. He says big innovators like Apple have become victims of their own success, struggling to beat revenue estimates and add new customers. Those tussles create challenges for tech and stocks in general in the near term.
“We’re back to a world where global central banks are no longer cocooning the market,” says Taimur Hyat, chief strategy officer at PGIM, the investment management business of Prudential Financial. “As they unwind quantitative easing, and heightened political and trade war risk leaves market participants jittery, we expect the tech sector and the broader market to see continued volatility in 2019.”
But that’s not necessarily a bad thing, experts say.
“Through all this, it’s important to remember that volatility is the friend of long-term investors: It creates entry points for asset purchases at potentially attractive prices,” Hyat says. As 2019 advances, Hyat says a select group of globally diverse tech firms will continue to show strong performance even as market risk persists.
Blake Oliver, senior product marketing manager at Los Angeles-based FloQast, agrees: “Despite the volatility in the market, there are still plenty of opportunities for investors. Much of the volatility over the past year has been driven by tech companies that can’t seem to keep consumer’s personal information secure — mostly because they profit by sharing and selling that information with others.”
As 2019 gets underway, here are the most important things to know about tech investing:
— Think about how tech will be used in the future.
— Consider hedging your bets.
— Be prepared for a tech-lash.
— Stay calm.
Think About How Tech Will Be Used in the Future
Any industry may be subject to obsolescence risk: having a process, technology or product become obsolete, reducing a company’s competitiveness in the marketplace. The ever-shifting nature of tech may heighten that risk.
Hyat says technological change will “blaze a trail of destruction across even the nontech sectors of investor portfolios, since the next phase of the technology revolution will be in technology-using firms,” many of which are far removed from the formal tech sector.
With that in mind, he says it’s important to evaluate how technological changes may impact total portfolio holdings to understand which asset types, securities or sectors face a higher risk of obsolescence from disruptive technologies and where the opportunities lie.
“Investors don’t need to find the unicorn in this next phase of technology-driven disruption, because the opportunities arising from the current wave of change are not limited to Silicon Valley or the narrowly defined tech sector,” Hyat says. “In fact, the greatest risk of obsolescence and the greatest potential for disruption will be in sectors as diverse as real estate, energy, and consumer goods.”
[See: 10 of the Best Tech ETFs to Own.]
Consider Hedging Your Bets
Market volatility may be a cue to pull focus and reevaluate tech positioning.
“This is a tough market for investing and ZEGA recommends avoiding picking single stocks for the majority of any portfolio,” says Jay Pestrichelli, an investment manager at ZEGA Financial, a Florida-based company that offers portfolio management, financial planning and consulting services. “Like we saw with Apple, even an industry titan can get derailed by global issues like challenges in China, which (can) expose investors to ‘single stock risk.'”
Pestrichelli says now is the time to look for ways to invest for tech growth and protect portfolios. “We’re seeing an increased interest in buy and hedge strategies that allow investors to participate in the tech upside, but limit their downside if the market slides.”
Besides Apple, other major tech names to report huge sell-offs recently include Facebook ( FB), AT&T ( T) and IBM ( IBM). “These are all single tech stocks we hedge in investor portfolios, and those hedges have helped them avoid losses,” Pestrichelli says.
Be Prepared for a Tech-lash
Tech is currently a major focal point for regulators and lawmakers, both in the U.S. and abroad. In May 2018, the European Union implemented General Data Protection Regulation, which in part governs how EU residents’ personal information is collected and used in the U.S. Earlier in April, Facebook’s data practices were the subject of a Congressional hearing in Washington.
Hyat says those events, along with geopolitical tensions between China and other G-8 countries over intellectual property and strategic technology, could elevate volatility among tech stocks.
“Investors should absolutely continue to brace for a techlash, as regulators and governments aren’t yet done with tightening regulation around tech firms that have, historically, taken advantage quite aggressively of limited rules in a bid to win customers, reduce tax burdens and outmaneuver governments,” he says. “It remains to be seen how much appetite technology-driven firms have to self-regulate versus waiting for regulators to impose new regulations.”
While privacy and security are central to regulatory concerns, big tech’s adherence to antitrust laws is increasingly being called into question. Russell says focusing on business-to-business stocks, rather than high-profile consumer-facing tech names may help to mitigate any risk increasing regulation may present.
Going back to basics with classic business-to-business growth stocks is also a way to downplay tech stock risk without abandoning the sector entirely, Oliver says.
“It isn’t nearly as sexy as social media and consumer tech, but there are plenty of fast-growing companies building critical Software-as-a-Service products (SaaS) for businesses all the way from small to enterprise,” he says.
Those products, which range from accounting software and collaboration apps to marketing automation programs, are being quickly adopted at the backend of every business in America, Oliver says. “We’re in the middle of a generational shift from on-premises and desktop software to cloud-based SaaS, and it’s a huge opportunity for both businesses and investors.”
[Read: How to Invest in a Startup.]
The overarching theme for tech in the months ahead may be one of hurry up and wait.
“Patience will be key as we move into 2019,” Russell says.”Technology has had a major correction and the next few months could bring more volatility.”
In terms of choosing new tech investments, “individual investors should take their cues from the institutional buyers who control the market,” Russell says. “They may want to seek out companies that are making new highs or leading their peers.”
“The next innovators will behave similarly,” Russell says. “Traders may want to wait for the new champions to emerge and then follow their momentum.”
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