Meanwhile, since the start of Q4, technology has been trailing the broader market. Global tech indices are down 7.9% with US tech down 10.8%. As a result, as of the end of October, global tech was trading at a 10% discount to its own 5-year history based on its price-to-book ratio and 18% discount based on forward earnings. However, while global technology companies as defined by the Global Industry Classification System have gotten significantly cheaper, they are still highly profitable with a return on equity of 27%.
Since technology has long been viewed as a high-risk sector, some investors will question the wisdom of increasing exposure with the fiscal cliff looming. However, what is interesting to note is that over the last decade, technology stocks have become much less volatile. In fact, financial stocks are now the global market’s most volatile sector.
Thus, we’re comfortable reducing exposure to US industrials while overweighting technology because this should allow investors to maintain their cyclical exposure with a cheaper sector, without raising the overall volatility of their equity exposure.
In addition to the normal risks associated with investing, narrowly focused investments typically exhibit higher volatility. Technology companies may be subject to severe competition and product obsolescence.
Russ Koesterich, CFA, is the Chief Investment Strategist for BlackRock.