1. What is your investment outlook for the global technology sector in 2019?
Technology stocks have been climbing a wall of worry this year, given concerns about regulation, growing trade tensions between the US and China, and concerns about global growth. Despite these headwinds, the sector’s long-term drivers have not changed. Sector metrics – earnings, margins, debt levels – are very strong relative to other sectors.
There remain a variety of strong businesses in which to invest, which are exposed to structural technology themes and are trading at attractive valuations. I have used some of the recent market weakness as an opportunity to initiate/add to positions.
While some investors are concerned about high valuations in technology, on a relative and historic basis the sector still looks attractive compared with others, and should benefit from long-term growth themes and robust company fundamentals. All of this bodes well for the sector.
2. What do you think could most surprise investors next year?
I think investors will increasingly appreciate that the sector has far more to offer than just the most well-known mega caps like FAANG. The extremely narrow, momentum-driven market that we saw in 2017, and for much of this year, is relatively unusual, however this has conditioned investors to expect more of the same going forward.
I think this is unlikely, and that we are likely to see further revisions to more normal levels of market breadth in 2019, and hence a greater variety of stocks leading the technology market.
A rotation away from the momentum trade and a small number of mega cap leaders would be positive for the portfolio, given its slight anti-momentum bias and my preference for mid and small cap companies.
Conversely, weaker FAANG performance, evident in October’s sell-off, could well continue into next year. The portfolio remains underweight or does not own most of the FAANG names.
I am cautious on most of these giants, as growing rivalry among them and increasing regulatory requirements will require greater investment and so raise costs, weighing on returns. Valuations on some of these firms are also excessive, and leave little scope for disappointment from earnings reports.
3. How do you plan to capture the best opportunities?
Innovation in the sector offers many investible themes. Autonomous and electric vehicles, AI and robotics are at initial development stages; semiconductors are enablers of such technology, and a subsector where the portfolio is overweight. Structural global growth in internet usage and e-commerce persists, with a significant increase in mobile internet traffic.
On the enterprise side, investment in IT is very strong. The combination of Big Data and the internet of things (IoT) mean that IT is being integrated into an increasing range of smart devices. IoT and Big Data technology is enabling a revolution in automated production.
I have been adding to positions in gaming companies, given the demographic widening in the computer games market. In software, companies exposed to demand for digitisation and Big Data solutions remain overweight positions.
The portfolio is also continuing to benefit from M&A activity, given the strategic value in many smaller technology outfits. We could also start to see opportunities relating to foldable smartphone technology, and a new leg of smartphone adoption.
IT services are a longstanding underweight area for the portfolio, however many firms in this space are now assisting businesses with digitisation and systems overhaul. There are also opportunities in the telecoms and telecom infrastructure space relating to 5G adoption.