Why should you look at Technology Indexes?
Technology is increasingly dominating every sector of the economy. There are many published studies about the importance of technology for the next years. Accenture Technology R&D published this year a report where it is highlighted that according to their global technology survey of more than 3.100 IT and business executives, 86 percent of the executives anticipate that the pace of technology change will increase rapidly or at an unprecedented rate in their industry over the next three years (1). Furthermore the rise of the millennial generation, the ‘born digital’ generation, demands a world fashioned to its needs and new expectations about how work should be organized. Pervasive collaboration technologies are reconfiguring long-established norms of employment.
These expected growth in the technology sector, suggests considering how it moved from an historical point of view and what is currently happening examining the price curve of two of the most well known sector technology indexes, commonly investable also with etf.
The most famous and oldest technology index is the Nasdaq 100. It was officially launched on January 31, 1985, and commonly viewed as the “Technology” index; but in reality the technology represents only the 53,96% of the index, that it is also heavily weighted in Consumer Services (24,57%) and Health Care (10,96%). The Nasdaq-100 purposefully omits the Financials Industry, and today, the index has 105 components, representing 100 issuers, four of which are from China: Baidu, JD.com, Ctrip and NetEase.
We have then the MSCI World Information Technology Index (for brevity we will rename in the article this index as MWIT), designed to capture the large and mid cap segments across 23 Developed Markets countries. It is one of the eleven world indexes created in 1999, to capture the breadth, depth and evolution of industry sectors. All securities in the index are classified in the Information Technology sector as per the Global Industry Classification Standard (GICS). Actually the index has 157 components, related to 12 technology sub-industries. Let’s start to look at the historical chart of this last index.
As we can see in the graph 1, after the bear market of the dot-com bubble started in March 2000, the price entered in a longe term uprising channel that has been broken in the beginning of 2014. A new little channel contained the prices for the last two years and then we had in Aug 2016 a new breakout.
If we compare using the performance, the MWIT, the Nasdaq 100 Index and the Msci World Index starting from the Nasdaq bottom after the subprime bubble, that is on March 9th 2009, we can see that the two tech indexes began to overperform the Msci World Index with a good correlation (0,959), but the Nasdaq 100 with a bigger beta (1,039 vs 1,014 of MWIT).
It seems from the graph, that the best performing index is the Nasdaq 100, but something is changing in the last period. If we look to an historical relative strength graph between the MWIT and the Nasdaq 100, we see that from August 2015, the MWIT started to reverse his relative strength trend.
If we zoom the chart putting togheter performance and relative strength we note that Nasdaq is weakening. This could be due to the presence of the part of non technology companies represented in the index.
But we can do some more considerations; the MWIT is composed of three industry groups indexes: Software & Services, Technology Hardware & Equipment, Semiconductors & Semiconductor Equipment.
The actual main strength of the MWIT index, is coming from two of these three industry groups: in little part from Software & Services and in the main part from Semiconductors & Semiconductor Equipment. Here are the performance graphs:
It is suggested a particular attention to the developments in the coming months of MWIT and its components, to have the confirmation that its relative strength could be the signal of a new medium-term trend change, which could lead the index to exceed the many outperformance years of Nasdaq 100.
Mario Valentino GUFFANTI
CFTe – SAMT Vice President – Swiss Italian Chapter – mario.guffanti@samt-org.ch
Disclaimer: the above article is for general information and educational purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.