Technology: disruption at a deeper level in 2019?

27/11/2018

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US/China trade friction is symptomatic of a deeper confrontation that has technology at its core, say Richard Clode, Alison Porter and Graeme Clark, Global Technology Portfolio Managers. The pathway to a denouement and the direction of the yield curve should shape global technology equity markets in 2019.


What are the key themes likely to shape markets in 2019?

The benefits of US tax reform were a key highlight of 2018 but with US mid-terms now out of the way and a divided House and Senate hampering Trump’s domestic agenda going forward, markets should now focus on any signs of an impending global recession, the yield curve trajectory and geopolitics.

While markets tend to focus on escalating trade friction, we see that as merely a symptom of a deeper root issue. We believe the rising tensions between today’s global superpowers, the US and China, are much broader and have technology and the control of intellectual property (IP) at their core. As we reach an inflection point in artificial intelligence, technology and national security become ever more intertwined. We view Trump’s desire to protect US technology IP as a key pillar of his current policies, manifesting itself not just in trade tariffs but also tighter controls on the export and transfer of US technology IP. On the other side, for exactly the same reasons, developing their domestic technology industry is a core part of China’s 2025 targets. Consequently, we do not believe a resolution of these tensions is likely short term. This creates risk as tensions escalate, especially for an industry like technology with a global supply chain, albeit one that – with scale and maturity – is much more flexible than it was in the past.

The treasury yield ‘break-out’ of September 2018 - which saw yields on 10-year US Treasury bonds reach a seven-year high having traded in a range for much of the year - finally put pressure on extreme valuation, high-duration stocks, notably some technology names that had performed well for most of the year as they were more insulated from rising trade tensions. We are currently at an impasse as these stocks remain very highly valued despite the sell-off, but we have yet to see the long-forecasted meaningful rotation from growth to value really take hold given cyclical trade tension and China slowdown-related pressures. Heading into 2019, which way this impasse breaks will be key to the direction of markets and will be defined by the yield curve trajectory and the impact of China stimulus from late 2018.


Where do you see the most important opportunities and risks within your asset class?

With more than half the world now online and accessible anytime, anywhere via smartphones and able to pay digitally, and with cloud infrastructure enabling companies to scale faster and at lower cost than ever before and artificial intelligence enabling the next wave of disruption, technology should continue to take a bigger share of the global economy. 2019 should see further validation of the prospects for technology to disrupt new industries, with the launch of a commercial autonomous ride-hailing platform by Waymo in the US and the potential initial public offering (IPO) of the world’s highest-valued private unicorn, Ant Financial, a title earned having already massively disrupted financial services in China. In addition, we are already seeing the first wave of 5G investment, which will accelerate in 2019 as the infrastructure for Internet of Things (IoT) develops over the next decade. We will continue to provide clients with exposure to these exciting growth themes, but overlaid with our proprietary and unique ‘navigating the hype cycle’ investment philosophy providing valuation discipline and risk awareness to try to reduce the volatility of returns. With interest rates finally normalising after almost a decade of quantitative easing (QE), we believe our valuation discipline will be all the more relevant going forward.

As we head into 2019, while the multiple secular growth trends of technology are very much intact - and in some cases accelerating - we are seeing some natural moderation in other areas. Hyperscaler cloud capital expenditure in 2018 was exceptionally strong and we believe will result in some digestion in 2019 despite ongoing strength in cloud adoption. The tailwind of US tax reform drove strong enterprise information technology (IT) spending for the first time in a decade, benefiting more mature areas of technology like PCs, servers and networks. We expect that to naturally tail off through 2019. Regulation will remain a headwind for the technology sector, but the landmark implementation of GDPR in the EU in May 2018 provides a much clearer framework for which to assess regulatory risk and makes it more manageable in our opinion.


How have your experiences in 2018 shifted your approach or outlook for 2019?

2018 saw a widening bifurcation in performance between growth and value, even within the technology sector, leading to the largest gap in performance between these two styles in more than a decade. Cheap money and growing cyclical concerns as China slowed and trade tensions escalated led to investors hiding in an ever-narrower group of companies; predominantly in domestic US-focused growth software and internet. Scant regard was paid to the valuation of these companies. It took the break-out of US Treasury yields in September to finally remind investors that some of these valuations were too extreme. Our valuation discipline precluded us from buying some of these names, even if we do continue to hold many higher-valued technology companies. While that led to some relative performance pain through the first three quarters of 2018, the sharp sell-off of those extreme valuation names in October validated our valuation discipline and made us all the more determined not to be seduced by the narrow pockets of overhyped technology stocks as we head into 2019.



Which themes have the potential to redirect markets in 2019? Download our Infographic to find out



Glossary

Extreme valuation: a stock that is priced very expensively compared to other companies.

Growth investing: an investment approach used when an investor believes a company has strong growth potential and company earnings are expected to grow at an above-average rate compared to the rest of the market.

Value: value investors search for companies that they believe are undervalued by the market, and therefore expect their share price to increase.

Duration: how far a fixed income security is sensitive to a change in interest rates, measured in terms of the weighted average of all the security’s remaining cash flows. It is expressed as the number of years. The larger the duration, the more sensitive it is to a movement in interest rates.

Cyclical: a cyclical company sells discretionary consumer items, such as cars. The prices of equities and bonds issued by cyclical companies tend to be strongly affected by the ups and downs in the overall economy.

Yield curve: a graph that plots the yields of similar quality bonds against their maturities. A yield curve can signal market expectations about a country’s economic direction.

Initial public offering (IPO): when shares in a private company are offered to the public for the first time.

Unicorn: a unicorn is a privately held startup company with a value of over $1bn.

Quantitative easing (QE): an unconventional monetary policy used by central banks to stimulate the economy by boosting the amount of overall money in the banking system.

Capital expenditure: spending on fixed assets such as buildings, machinery, equipment and vehicles in order to increase the capacity or efficiency of a company.

GDPR: the General Data Protection Regulation is a set of EU-wide data protection rules that aim to protect the privacy of individuals.

Cheap money: an environment of low interest rates and plentiful supply of money to borrow from banks.




These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Important information

Please read the following important information regarding funds related to this article.

Janus Henderson Global Technology Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

Janus Henderson Horizon Global Technology Fund

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355) (incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE and authorised and regulated by the Financial Conduct Authority) provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Henderson Global Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

Specific risks

  • Investment management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • If a Fund has a high exposure to a particular country or geographical region it carries a higher level of risk than a Fund which is more broadly diversified.
  • Derivatives use exposes the Fund to risks different from, and potentially greater than, the risks associated with investing directly in securities and may therefore result in additional loss, which could be significantly greater than the cost of the derivative.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • The Fund's value may fall where it has concentrated exposure to a particular industry that is heavily affected by an adverse event.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

Risk rating

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