GLOBAL TECHNOLOGY SECTOR: IN THE LONG TERM, THE PANORAMA IS STILL BRIGHT

  • The financial indicators of the sector, such as profits, margins, debt levels, etc., are very solid compared to those of other sectors
  • There is still a wide variety of businesses to invest that are exposed to structural trends and are quoted with attractive valuations
  • The structural growth of Internet use and electronic commerce continues throughout the world, with a significant increase in Internet traffic through mobile
  • The combination of big data and the Internet of things makes IT integrate into an increasingly broad range of smart devices

Despite the recent volatility, the global technology sector continues to show solid fundamentals vis-à-vis other sectors and a wide variety of investment opportunities with attractive valuations and linked to long-term technological trends. Next, the fund manager FF Global Technology of Fidelity International , Hyun Ho Sohn , analyzes the keys of the industry during this year.

What are your prospects for the global technology sector in 2019?

Technological values ​​have escalated a “wall of concern” this year due to regulatory concerns, growing commercial tensions between the US. and China and the uncertainties surrounding global growth. Despite these difficulties, the sector’s long-term drivers have not changed. The financial indicators of the sector, such as profits, margins, debt levels, etc., are very solid compared to those of other sectors. There continues to be a wide variety of businesses to invest that are exposed to structural trends and are quoted at attractive valuations. I have taken advantage in part of the setbacks the markets have suffered recently to take or strengthen positions. Although some investors are concerned about the high valuations of the technology sector, From a relative and historical point of view, the sector remains attractive compared to other areas, as it benefits from long-term growth trends and very firm business fundamentals. All this paints a positive outlook for the sector.

What do you think could surprise investors more next year?

I believe that investors will value more and more that the sector has much more to offer than the great known values ​​(FAANG, etc.). The market extremely narrow and moved by the time we saw in 2017 and much of this year is relatively unusual, but has conditioned investors to expect more of the same in the future. I think that is unlikely, since we may see a change towards more normal market amplitude levels in 2019 and, therefore, a greater variety of values ​​at the forefront of the technology sector. The withdrawal of the bet at the moment and a small number of megavalues ​​would be positive for the fund, due to its bias slightly contrary to the moment and my preference for small and medium capitalization companies.

On the contrary, the bad behavior of the FAANG, evident in the strong falls of October, could continue perfectly next year. The fund remains underweight in most FAANG securities or does not have them in portfolio (except for the overweight in Alphabet). I am cautious about most of these giants, as the growing rivalry between them and the increase in regulatory requirements will force them to make more investments and take on more costs, which will weigh on corporate profits. The valuations of some of these companies are also excessive and leave little room for disappointments when results are presented (as was the case with the market reaction to the latest figures published by Amazon).

How do you intend to take advantage of the best opportunities?

The innovation of the sector offers many themes to invest. Autonomous and electric vehicles, AI and robotics are taking their first steps; semiconductors are an essential element for these technologies and a sub-sector where the fund is overweight. The structural growth of the use of Internet and electronic commerce continues throughout the world, with a significant increase in Internet traffic through mobile. At the business level, it is investing decisively in IT. The combination of big data and the Internet of things means that IT is integrated into an ever wider range of intelligent devices. These two technologies are enabling a revolution in automated production (“Industrial Revolution 4.0”). I have been reinforcing positions in gaming companies in view of the expansion (demographically speaking) of the computer games market. In the software sector, companies exposed to the demand for digitization and big data solutions are still overweight.

The portfolio continues to benefit from corporate operations, given the strategic value of many smaller technology businesses. We could also begin to see opportunities related to folding mobile technology and a new phase in the adoption of smartphones. IT services are an area that has traditionally been underweight in the background, but many of these companies are now helping others to digitize and renew their systems. There are also opportunities in telecommunications and telecommunications infrastructure in relation to the deployment of 5G networks.