Global Technology portfolio managers Alison Porter, Graeme Clark and Richard Clode, discuss the reasons for their positive view on tech stocks and share their outlook for the second half of 2018.
How have tech stocks fared so far this year?
Commensurate with wider global equity markets, technology has seen a return to more normalised share price movements so far this year. However, against a backdrop of escalating trade protectionism, the regulatory cacophony reaching a crescendo, weak iPhone X sales angst and cryptocurrency fever, technology has continued to outperform broader equities over the longer term and year-to-date*. We believe prospects for tech companies remain strong despite investor concerns, with long-term growth trends intact and a near-term boost from US tax reform encouraging corporates to loosen enterprise IT budget purse strings.
Has your outlook for the remainder of the year changed?
The ability of technology companies to generate substantial profits and invest heavily in research and development, innovate and disrupt industries remains very much intact. Recent corporate earnings reports highlight the acceleration of the adoption of the cloud (large industrial scale computing and storage that enables cheap, fast compute power and access to machine learning) and artificial intelligence (AI) services like Amazon Alexa.
The resurgence of enterprise IT spending with the best conditions in a decade was also evident in recent company discussions. This provides a strong backdrop for technology companies when both the new and older areas of technology are on a solid footing and seeing accelerating growth.
While rising protectionism to date has been kept in check and has not overly disrupted the global technology supply chain, we must be vigilant for further escalation. Regulatory concerns remain elevated but these are not new, evidenced by the recent implementation of the Global Data Protection Regulation (GDPR) in the European Union after four years of deliberation. This will provide greater protection and transparency of data privacy for consumers and the larger technology companies appear well prepared for its adoption.
Where are you finding the most attractive opportunities?
We believe artificial intelligence is the next paradigm shift in technology and while it is still nascent and in some areas overhyped, AI will enable technology to disrupt a much wider set of industries relative to major computing platforms before it, like the internet. The cloud is accelerating the adoption curve of AI by democratising new technology, offering it as a service at a low cost to everyone. This ability to take market share from a broader array of industries, and the technology spend required to build out the next generation infrastructure to support cloud and AI services, provides a supportive long-term backdrop for technology companies.
With significant capital attracted to the tech sector, both private and public, we must remain vigilant of valuations and hype, and not mistake cyclical business-cycle dependent growth for secular long-term growth, given a buoyant global economy. This can be an issue for more niche thematic portfolios. Our broader technology mandate and the comprehensive experience of the portfolio managers within our team allows us to better navigate the hype cycle and as we seek to invest in the right technologies, at the right time and at the right valuation.
*Source Thomson Reuters Datastream, MSCI ACWI Information Technology Index vs MSCI World Index 10 years and year-to-date to 30 April 2018. Note past performance is not an indicator of future performance.
Navigating the hype cycle: identifying and understanding where an emerging technology is on the hype cycle (maturity, adoption, social application phases), which helps to avoid areas of the market in the hype phase.