About That Tech Slowdown: The Big Digital Tomorrow Will Restore Its Place

Legacy stocks are leaders now, but 5G and other digital revolutions promise to return the disregarded innovators of yore to the fore again, Citi says.

OK, so the old economy stock plays are having their day now, and tech sure is not. And maybe the turnabout is fair play after the long romp of tech titans such as Google parent Alphabet (up 29% in 2020, flat this year) and Apple (ahead 76% last year, also flat in 2021), when legacy industries’ stocks just wheezed along.

Sure, onetime pandemic-stricken stocks are rebounding with a vengeance. Look at those in banks, oil and gas, airlines, cruise lines, hotels, and restaurant chains. This year through last week, according to Yardeni Research, financials had risen 27.6%, energy, 45.2%, and industrials, 16.8%. Information technology (IT) has managed just 7.2%.

Before getting too deep with the schadenfreude here, Citigroup’s private bank, in its mid-year outlook, has a word of caution for those jubilant at the old-school resurgence: What you’re seeing is temporary. These soaring old-timey sectors “are enjoying a powerful recovery in earnings forecasts and equity performance,” the bank’s mid-year report stated, but “it is unlikely that they will lead markets higher in the medium or long term.”

How come? We’re only getting warmed up when it comes to digitization. And, according to Citi, the cyber comeback still has far to go. Consider the rollout of the fifth generation of wireless data technology (5G). This, the report stated, “will enable a vast increase in the number of devices connected to the internet.”

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The new capability will move beyond today’s computers or smartphones and hook up household appliances, cars, and machinery to the web. The total number of worldwide connections, Citi declared, could expand from 0.76 billion today to 3.6 billion by 2025.

To Citi, “the age of hyperconnectivity has implications for many other dimensions of digitization.” With the explosion of data upcoming, there will be a greater need for enhanced artificial intelligence (AI) to make sense of it all. And, naturally, more and more of all this will increase the need for better cybersecurity. “Smart cities, robotics, and self-driving vehicles” will flourish in such a time, Citi analysts projected.

Further, hyperconnectivity will boost other “unstoppable trends,” in Citi’s view. Chief among them: the economic rise of Asia. “Many millions of people in Asia will gain internet access for the first time,” the report maintained, “transforming their consumer behavior.”

By Citi’s assessment, “in 2021 so far, digitization has broadly underperformed old economy sectors that stand to benefit from the reopening of the global economy.” Any “further dips” in tech stocks, therefore, are a buying opportunity, it said. Shareholders in Apple, Alphabet, and the rest should take heed. Their trials soon should be over.