US has no monopoly on good technology

One of the things that caught my eye in this morning’s BBC news was a photo of Mark Zuckerburg, looking rather smug, captioned “Facebook founder sees wealth hit $100bn after TikTok rival launch”. Apparently, Instagram Reels is set to capture the short-form video market from TikTok (no doubt helped enormously if Trump succeeds in banning TikTok from the US). In other news, Tencent’s shares briefly dived by 10% after Trump said he would also ban WeChat (even though its US business is relatively small).

The technology sector has been a standout winner this year as investors seek out companies that can thrive in spite of the economic pressures of COVID-19. Many software and hardware companies have cited the growth in home working as a driver of revenue growth over the last few months.

On a geographical basis, the highest rising stock market is China’s, and especially its domestic A share market. In part, this reflects China’s success in tackling COVID-19.

Polar Capital Technology and Allianz Technology have both captured the gains in the technology sector. Over a year, the Polar fund is just ahead of its rival, up by 44.3% to Allianz Technology’s 44.2%.

Both portfolios are skewed towards larger companies with 87% in companies with a market capitalisation above $10bn. Both have Apple and Microsoft as their largest holdings but Polar’s positions are larger. Thereafter, the portfolios are quite different, which I find intriguing.

Polar’s top 10 includes Alphabet, Facebook, Tencent, Alibaba and Amazon. Allianz’s has CrowdStrike, Zoom, Tesla and Micron Technology.

What stood out to me though was Polar’s much more geographically diversified portfolio – 70.7% of it is in the US and Canada versus 90% for Allianz Technology. To me, that feels like common sense. Yes, the US has dominated the tech space for many years but tech companies, especially software based tech companies, are global in nature. If they have a good idea, it doesn’t matter where they are based, they can sell their product anywhere (politics permitting).

A good example of this, which came up when I was writing a note about Aberdeen New Dawn, is Xero, the New Zealand-based accounting technology company. It has a great product, doesn’t need to be physically present in a market to sell its technology and consequently is expanding fairly rapidly. These Software as a Service (SaaS) business are booming as the cost of cloud computing falls. This is what attracted James Thom – Aberdeen New Dawn’s manager – to it.

Another stock that he has picked up for that fund is Meituan Dianping. It is a food delivery business in China. It dominates its local market for restaurant deliveries (the equivalent of Deliveroo) and is growing its grocery delivery business (the equivalent of Ocado). I knew it was a multiple of the size of its nearest global competitor but, when I went searching for stats, an inquiry along the lines of “largest food delivery companies” only returned US names. It is a similar story in many other categories.

I do wonder whether the US has deluded itself to believe that it has an unassailable lead in the global technology market. By trying to push China’s technology companies out of its market, it may be doing more harm to itself than good.

Chinese firms have a far larger domestic market to go after and China’s consumers are becoming more affluent. In addition, a global technology market polarised between those in the US camp and those in China’s camp could end up being skewed in China’s favour. For example, the UK and Australia may have joined the US in banning Huawei from their telecoms infrastructure but most of the rest of the world is still open to it.

Whether or not the US/China war of words rumbles on beyond the election, the next set of global winners may not originate in either country. For example, one of the best performing large technology stocks this year has been Sea Limited, a Singaporean consumer internet company that for now, is focused on South East Asia and Taiwan but whose ambitions are global. That’s why Polar’s greater geographic diversification makes sense to me.

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