There’s Much More to Tech Investing than the US Market

Although US technology equities tend to dominate the conversation about technology investing, Franklin Equity Group’s John Remmert and Don Huber believe there are many innovative international technology companies that tend to get overlooked.

From cloud computing and e-commerce to clean technology and self-driving cars, technology has been one of the world’s hottest stock-market sectors in the past few years. Technology investing typically leads one to think of California’s Silicon Valley, home to both some of the world’s best- known technology behemoths and the many innovative early-stage companies hoping to one day join their ranks. In recent years, the Chinese tech giants have also come into their own. Often overlooked, we believe, are the many innovative international technology companies that lack either the name recognition or the sheer size of their US and Chinese counterparts, but are at the forefront of growing technological change across the global economy.

The Market-Cap Gap

Because of their increasing size and interest from investors in recent years, mega-capitalization US technology companies have come to dominate not only the world’s attention, but also the US and global equity benchmarks. Meanwhile, Chinese technology and internet companies are an increasing part of the emerging market indexes.

Underscoring just how dominant the US technology sector has become, as of December 31, 2020, it made up more than 29% for the MSCI USA Index and more than a fifth of the MSCI World Index, according to data from MSCI.1 Moreover, the weighting of information technology stocks in the global benchmark is the highest it has been over the past 25 years. However, while this is an easy guide to showing just how dominant US technology stocks have become, the size of the information technology sector does not quite begin to provide the full picture of technology’s dominance, as internet retailers and social media companies can be found in the consumer discretionary and communication services sectors, respectively. The story is similar in emerging markets, where the technology sector is about 20% of the MSCI Emerging Markets Index, and that does not include many of the Chinese internet giants.

The story is much different in developed markets outside the United States. In the international equity markets, the technology sector is not even among the five biggest, making up only about 9% of the MSCI EAFE Index at the end of 2020, according to MSCI. While they may not be dominant from a market-cap perspective, we have found a significant number of smaller, high-quality technology companies to invest in that are just as innovative and fast-growing as the US companies that have garnered much of the focus in recent years.