Computing sub-sector to keep driving Nasdaq in the era of AI

February 26, 2020 12:16
Nasdaq has seen different sub-tech-sectors, particularly biotech, computer and telecom, outperform in different eras. Photo: Reuters

The stock market correction that started recently was again led by the technology sector. Yes, a leading sector tends to lead both ups and downs in cycles. We all know that tech has been the leader: Compared with the dip of eleven years ago the main board is now up 5.1-fold while the Nasdaq is almost 7.8-fold. The extra 270 percent return should be the so-called tech-premium.

Which sub-sector(s) in the Nasdaq is/are performing the best? Let’s take a look at the historical data. The Nasdaq composite index has its history dating back to the early 1970s, but some sub-sectors have their earliest history in late 1993, and three of them are most relevant: biotech, computer and telecom.

The year-on-year percentage changes of them are computed, and accordingly our comparison starts from 1995. The broad composite index is also shown.

The first observation is that the sub-sectoral ups and downs are by and large in line with the overall tech sector (the composite index), especially in the era of large swings like early 2000s and 2007/08. Only when the overall market volatility is low like in the past few years would different sectors perform differently. And this usually happens when the market is up.

Secondly, different sub-tech-sectors outperform in different eras. In the 2000s telecom was the leader; between 2011 and 2015 it was biotech that was the leader; while in 2009/10 and 2016 to now it was the computing segment that led.

There are reasons for this phenomenon. Different technologies have breakthroughs in different times. 2000s was the era of 4G, which is far more advanced than 3G. Five to ten years ago it was the era of biotech as both immunotherapy and neuroscience saw big advancement.

Now is the era of artificial intelligence and big data as everyone knows. These would have much wider impact because telecom and biotech are sector specific while computer penetrates into all sectors.

Since deep learning has made significant progress over the past decade, we are beginning to see widespread adoption of such technology, and libraries of algorithms are readily available.

Very often, the application of technology is where most money is made. Thus, the services providing industries that are ready to adopt such technologies should have bright earnings future, and these are not limited to any particular sector.

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Sub-sectoral ups and downs are by and large in line with the overall tech sector, especially in the era of large swings like early 2000s and 2007/08. Data source: Nasaq

The author is Adjunct Professor in the Department of Economics and Finance, City University of Hong Kong and previously the chief economist of a bank. (, [email protected])