Mark Barnes, PhD
Indhu Raghavan, CFA,
The global Technology industry is not a monolith and concentration within regional Tech industries and subsectors can have an outsized influence on overall industry performance.
- The Technology industry is not a monolith. Regional Tech industries can behave differently driven by their unique composition of subsectors.
- Concentration within regional Tech industries and subsectors can have an outsized influence on overall industry performance, as we saw in October when Technology performance in Europe and Japan diverged from that of the US and Emerging.
- While US Technology has many heavyweights that influence markets, certain other regional Technology industries exhibit a more acute concentration of weights.
- This is key to understanding if the industry’s performance was broadbased or hinged on the fortunes of one or two names.
The Technology industry, fuelled by AI optimism and related capital investment, has been a major contributor to global equity returns over the past year. However, global Technology is not a monolith and can behave differently in different regions.
After more or less gaining and moderating in sync over the last 12 months, regional Tech industry performance diverged in October, as we observed in the recent FTSE Russell Performance Insights report. USA Technology and Emerging Technology held steady over the month, while Technology in Developed Europe ex UK and Japan pulled back (Exhibit 1). Is this a sign of a shift in the tailwinds behind Tech outperformance, or something else?
Exhibit 1: 12-month cumulative returns of regional Technology industries (rebased, USD)
Source: FTSE Russell/LSEG. Data as of 31 October 2024. Past performance is no guarantee of future results.
To better understand the recent divergence in performance, we took a closer look at the composition of regional Tech industries at the subsector level and their contribution to tech’s performance in each region. Exhibit 2 describes the ICB classification of the Technology industry into sector and subsector and the types of companies that constitute each subsector.
Exhibit 2: ICB classification of the Technology industry into sector and subsector
| Sector | Subsector | Definition |
|---|---|---|
| Software and Computer Services | Computer Services | Companies that provide consulting or integration services to other businesses relating to information technology. |
| Software | Publishers and distributors of computer software for home or corporate use. Excludes computer game producers. | |
| Consumer Digital Services | Companies involved in digital platforms that primarily generate revenue from advertising, content delivery and other virtual products for consumers. | |
| Technology Hardware and Equipment | Semiconductors | Producers and distributors of semiconductors and other integrated chips, semiconductor capital equipment and motherboards. |
| Electronic Components | Companies involved in the application of high-technology parts to finished products, including printed circuit boards. | |
| Production Technology Equipment | Manufactures of high-technology tools and/or equipments that are used in the creation of semiconductors, photonics, and wafers. | |
| Computer Hardware | Manufacturers and distributors of computers, servers, mainframes, workstations and other computer hardware and subsystems. | |
| Electronic Office Equipment | Manufacturers and distributors of electronic office equipment, including photocopiers and fax machines. |
Source: FTSE Russell/LSEG. Past performance is no guarantee of future results.
For example, manufacturers of semiconductors for AI computing and other uses, such as Nvidia in the US, are classified under the Semiconductors subsector. And manufacturers of the equipment and tools that are used to make semiconductors, such as ASML in Europe or Tokyo Electron in Japan, are classified under the Production Technology Equipment subsector.
In Exhibit 3, we show normalized subsector weights within the tech industry to allow comparison across regions. The eight Tech subsectors are distinguished by color. For example, the largest subsectors within Japan Technology are Computer Services (dark blue) and Production Technology Equipment (violet). And Software (orange) is the smallest part of Japan Tech.
Further, within each subsector we highlight large individual Tech stocks (ones that make up more than 1%pt of their entire regional equity index.) This gives us an idea of how much each subsector’s performance may be impacted by one or two large stocks within that subsector. Again, taking the example of Japan Technology, Tokyo Electron, a single stock, accounts for nearly half of Production Technology Equipment (violet) in Japan.
Exhibit 3: Regional technology industry breakdown by subsector, October 2024
Source: FTSE Russell/LSEG. Data as of 31 October 2024. Past performance is no guarantee of future results.
With this breakdown, we note several interesting features of each regional Technology industry. As expected, US Tech is dominated by several large individual stocks. (Elsewhere, we have noted how concentration within US equities and within US Tech have impacted global equity performance.) But what is also interesting to note is that these large individual names are distributed across subsectors whose performance at a fundamental level may be driven by different economic themes, consumer behavior, regulatory trends, etc.
For example, we see that Alphabet and Meta are in Consumer Digital Services (dark grey). Microsoft is part of Software (orange) and Apple of Computer Hardware (teal). Within Semiconductors (brown), Broadcom and Nvidia are the big names. To be sure, these names often dominate Tech’s performance by the sheer size of their representation. For example, Microsoft, part of Software, constitutes nearly 18% of US Tech, while the other 30 names within Software account for 11.5% of US Tech. However, the US is not unique in this respect, and in other regions, we sometimes see a more acute concentration of weights in one or two subsectors and stocks.
Considering Technology within the Emerging index, nearly 42% of Emerging Technology is in Semiconductors (brown) and a single name within that subsector, Taiwan Semiconductor Manufacturing Company (TSMC), accounts for 34% of Emerging Technology. The next largest subsector, Consumer Digital Services (dark grey), accounting for 33.5% of Emerging Tech is dominated by three Chinese Tech names—Meituan Dianping, PDD Holdings and Tencent Holdings—making up nearly 27% of Emerging Technology.
Similarly, in Developed Europe ex UK, two names—SAP and ASML Holding—collectively account for over 64% of the Tech industry. ASML Holding, part of Production Technology Equipment, makes up 36.4% of Europe Technology while the only other name in that subsector accounts for 3.4%.
As we will see, companies such as TSMC and ASML often carry their subsector’s contribution to performance. However, concentration can cut both ways.
In Exhibits 4-7, we look at the Tech industry’s contribution to index returns with a breakdown by subsector to get better insight into what areas have been driving Tech’s contribution over the last 12 months. Contributions are weighted returns and so consider both returns and weights. A single block of color dominating contributions in a given period shows that the industry’s return was dependent on the performance of a single subsector, and perhaps even one or two stocks if that subsector also happens to be concentrated.
Exhibit 4: USA Technology monthly contribution by ICB subsector
Source: FTSE Russell/LSEG. Data as of 31 October 2024. Past performance is no guarantee of future results.
In the US (Exhibit 4), while Semiconductors (brown) has sometimes dominated Tech’s contribution, many subsectors have notably contributed during most months (and sometimes detracted). In October, while Software and Computer Hardware notably detracted, it was balanced by contributions from Semiconductors and (to a lesser extent) Consumer Digital Services.
Exhibit 5: Developed Europe ex UK Technology monthly contribution by ICB subsector
Source: FTSE Russell/LSEG. Data as of 31 October 2024. Past performance is no guarantee of future results.
By contrast, in Europe (Exhibit 5) and Japan (Exhibit 6), Production Technology Equipment (violet) has either carried or dragged the Technology industry’s monthly contribution during several months. In October, in Europe, Production Technology Equipment detracted by -0.73%, of which ASML Holding was responsible for -0.68%. In October, in Japan, Production Technology Equipment that had contributed strongly during Q4 2023 and Q1 2024, was essentially flat, with a 0.005% contribution, and unable to balance out the detraction by other subsectors.
Exhibit 6: Japan Technology monthly contribution by ICB subsector
Source: FTSE Russell/LSEG. Data as of 31 October 2024. Past performance is no guarantee of future results.
In Emerging Technology, unsurprisingly, the two largest subsectors, Semiconductors (brown) and Consumer Digital Services (dark grey), have dominated Technology’s contributions most months. In October, while Consumer Digital Services detracted with the broader pullback in Chinese equities, Semiconductors contributed 0.60%, of which TSMC contributed 0.56% propping up Emerging Technology’s performance for the month.
Exhibit 7: Emerging Technology monthly contribution by ICB subsector
Source: FTSE Russell/LSEG. Data as of 31 October 2024. Past performance is no guarantee of future results.
Conclusion
In every region, there are leaders that dominate specific Tech areas. However, certain regional Technology industries may be heavily reliant on the fortunes of one or two subsectors and even one or two stocks. US Technology is certainly concentrated with heavyweights that can move global markets given the US’s representation in global indices, but it is worth keeping in mind that some other regional Technology industries may have an even greater reliance on one or two subsectors and names that seem to drive overall industry performance. This is important to understand if a moderation or pullback in regional Technology industry performance is a sign of a shift in trends or the result of headwinds faced by a specific company or subsector.
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