It’s often said the bigger they are the harder they fall. In the case of big global technology, the fall has been especially hard so far this year. 

According to Refinitiv data, the global technology sector was down around 15% at its low in late-January from its recent peak in late November. By comparison, global stocks overall were down around 8%.

Why the fall and what is the outlook? More broadly, how can investors get access to the dynamic technology sector if they start to feel it’s becoming oversold?

[Editor’s Note: Do not read the ideas below as recommendations. Do further research of your own or talk to a licensed financial adviser before acting on themes in this story.]
 

What caused the decline

By way of backdrop, it should be noted that technology was the standout global sector in the years leading up to the COVID-19 crisis. The migration of news, entertainment and even retail spending to the internet – and especially on mobile phones – has underpinned strong growth in the technology superstars, such as Amazon, Google, Netflix and Apple in the United States, and Alibaba, Tencent and Baidu in Asia.  

This was helped by the trend decline in interest rates, due to persistently low inflation prior to the COVID-19 crisis. Low interest rates and ample liquidity made it more enticing for investors to seek returns through already richly-priced technology stocks – even though some were promising to turn a profit only years into the future.   

Then COVID-19 struck – with lockdowns accelerating the trend towards online shopping and mobile work arrangements. Technology not only was a growth sector but also acquired added defensive qualities. Central banks responded by boosting liquidity further, adding to the allure of growth stocks.

In short, in early 2020, COVID-19 only added to the longer-term trend favouring technology stocks.

Since then, however, the performance of tech stocks has been patchy. For starters, the gradual re-opening of economies following the first wave of lockdowns saw more people venture out of their homes, reducing the initial pandemic-related burst of internet activity.

As the crisis evolved, bonds yields began to rise, as markets anticipated that central banks would eventually unwind the emergency levels of liquidity. 

These trends allowed so-called “value” stocks – such as energy and financials – to recover after having been beaten down in early 2020.  
 

Asian tech

In Asia, China’s regulatory crackdown on several major technology companies caused these stocks to fall especially hard.

All that said, non-Asian technology stocks nonetheless held up reasonably well over most of 2021 despite a surge in inflation – as major central banks refused to tighten policy on the grounds that the surge in prices reflected pandemic-related supply chain disruptions that would prove only temporary.

Beginning with the US Federal Reserve, however, central bank patience with high inflation began to wear thin late last year. After all, while supply chains were clearly stretched, inflation in part reflected very strong demand brought about by massive fiscal and monetary stimulus. US unemployment has also fallen to low levels, with the resulting labour shortages causing a spike in wage inflation.

These trends were too hard to ignore, and the Federal Reserve strongly signalled it would raise rates several times this year and end its policy of buying billions in government bonds each month. The Bank of England has already begun raising interest rates and the ultra-dovish European Central bank has hinted at higher rates potentially later this year.

Bond yields have moved sharply higher in recent months, with the yield on U.S. 10-year bonds recently testing 2%. In turn, higher interest rates – together with the ongoing re-opening of economies – has undercut the once strong allure of technology stocks. 
 

Outlook for tech

Economic re-opening and central bank tightening are two key trends that are likely to persist over the coming year, suggesting the relative performance of technology stocks could remain under downward pressure, in BetaShares’ opinion.

That said, we believe the longer-term trend towards technology disruption remains in place, suggesting the strong relative performance of technology stocks could reassert itself once current inflation and interest rate pressures subside.

Thanks to the structural forces of globalisation and technology disruption, both interest rates and inflation are likely to remain reasonably low over the years ahead. 

All things considered, the current pullback in technology stocks might represent a buying opportunity for some long-term investors, in BetaShares’ opinion.
 

How can investors gain exposure to the technology sector?

You can of course gain exposure to technology by investing in individual technology stocks. However, this is a high-risk/high reward approach - picking winners is notoriously difficult. For every Amazon or Netflix, there can be hundreds, even thousands, of companies trying to exploit the same opportunities that fail.

Another option is to gain exposure through a technology-focused ETF. An ETF invests in a portfolio of companies, reducing stock-specific risk.

Another benefit of investing via an ETF is that you buy and sell on the ASX just like investing in shares. Most technology stocks are listed on overseas exchanges, so investing directly in those stocks involves having an international investing account, with the administrative complexity, taxation implications and need to deal in foreign currency that that entails.

There are broad-based technology ETFs traded on the ASX, such as the BetaShares NASDAQ 100 ETF (ASX: NDQ), and the BetaShares S&P/ASX Australian Technology ETF (ASX: ATEC). 

There are also ETFs focused on particular technology themes such as cloud computing (the BetaShares Cloud Computing ETF (ASX: CLDD)), cybersecurity (the BetaShares Global Cybersecurity ETF (ASX: HACK)), and automotive technology (the BetaShares Electric Vehicles and Future Mobility ETF (ASX: DRIV)).