JH Alison PorterAlison Porter (left), Graeme Clark JH Graeme Clark (right) and Richard Clode, portfolio managers in the UK-based Janus Henderson Investors Global Technology Team, share their outlook for 2018 and the reasons why they believe technology stocks have the potential to continue to outperform global equities in the long term.

 

Lessons learned from 2017?

 

We think the main lesson was that the long-term secular theme of technology innovation and disruption trumps near-term politics and macroeconomics.

Rewind to the aftermath of the US presidential election, where Republican Donald Trump’s unexpected victory drove a rebound in cyclical stocks and negativity around the technology sector given the vocal support for the Democrats from many of the industry’s leaders.

‘technology innovation and disruption trumps near-term politics’

Today we look back on 2017 as one of the strongest years for technology stocks as there was a broad-based acceleration across many of the key investment themes running through our portfolios.

Internet transformation and ‘winner takes most’ was very evident globally, the migration to the cloud continues apace and we are seeing a turning point in artificial intelligence, which is enabling a wide array of new technologies from voice-activated virtual assistants in the living room to autonomous driving.

 

Key themes for your markets in 2018 and portfolio positioning implications?

 

As was the case in 2017, while monetary policy changes, tax reform and the US mid-term elections are likely to dominate the macroeconomic backdrop for equity markets, we believe technology will continue to be driven by its ability to increase productivity and disrupt the old economy.

We have already seen the shift from monetary policy and quantitative easing to a focus on fiscal easing with tax cuts and increasing government spending; rising populism is demanding an end to austerity and central banks look to begin the process of withdrawing monetary stimulus.

That will likely continue in 2018 with the focus on US tax reform, which may provide a boost to the US economy via tax cuts while a windfall tax on repatriated US corporate profits also has the potential to unlock trillions of dollars of US corporate cash that has been sitting offshore.

The majority of that cash is held by technology companies and its repatriation creates the opportunity for these companies to invest more in research and development and increase capital expenditure, embark on strategic mergers and acquisitions and ultimately drive shareholder returns. Across our portfolios we look to benefit from large US technology companies with significant cash held offshore.

The technology sector is truly global and reliant on relatively frictionless trade while also being predominantly priced in dollars.

‘truly global and reliant on relatively frictionless trade’

Although not evident today, potential headwinds include a reversal of the current dollar weakness making technology more expensive and protectionist trade policies.

We think regulation and competition will continue to be significant albeit manageable risks. The security and privacy of data will continue to be scrutinised by regulators while the growth of technology is also attracting a lot of private and public capital, which can lead to irrational competition and overly exuberant stock valuations in some areas of the market.

 

Key risks and opportunities for 2018?

 

We view technology through waves of computing going back to the mainframe computer through the PC and the advent of the internet, to today’s third wave of the smartphone, mobile internet and the cloud.

In our view the third wave has a lot of room to grow given only around half the world’s population is online today.

‘the fourth wave of artificial intelligence’

We will continue to invest in tech stocks by balancing the most attractive growth potential and sustainable barriers to entry with a valuation discipline around key long-term themes that we have identified, including finding the winners in the global internet transformation, the beneficiaries of the move to the cloud and payment digitisation.

The start of the fourth wave of artificial intelligence is also presenting opportunities to gain exposure to exciting new areas of disruption like the technological revolution we are witnessing in transportation.

 

 

Glossary:

Cyclical stocks: stocks whose share prices are sensitive to changes in the overall economy.

Internet winner takes most: strong network effects on the internet (the more users use a product or service the more additional value it gains)create winner takes most markets for example in the  the  shift from offline to online advertising, entertainment and e-commerce.

Cloud computing: managing IT services remotely by buying computing and storing technology from specialised service providers over the internet.

 

 

 

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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