At GAM Investments’ Weekly Investment Meeting held on 28 November 2018 the speaker was Mark Hawtin, who highlighted the opportunities in the technology space from a valuation perspective.
I believe we are in an interesting time for markets. Warren Buffett was famously quoted about the market in the short run being a voting machine and in the long run being a weighing machine. It feels like we are at one of those critical junctures where the market is very much a voting rather than a weighing machine. In the sell-off we have seen there is not yet enough evidence to know whether this is the beginning of a downturn.
The technology sector is often the first area susceptible to any market downturn. If we go back to the 2008 global financial crisis (GFC), tech was very much the first area to sell-off and the first to bottom, a full five months before the rest of the market followed. We have seen some aggressive reactions within technology this year, and as always happens, most shares get treated equally. Within what one might call the industrial category – semiconductors and hardware – there have been weaker numbers.
However in the software space in particular there has been no change to company fundamentals. None have missed their numbers, and indeed in many cases we have seen increased guidance for both revenue and profitability going into the rest of the year.
During the GFC, mature companies such as Amazon and Salesforce saw small reductions in their growth rate relative to what the market expected, however there was no real degradation. In what was certainly a major crisis there was no major reduction in growth expectations, and in the current phase of disruptive technology it feels like we are in a similar situation. We do not believe these companies will be impacted by any downturn; if share prices fall that actually provides a phenomenal opportunity, in our view.
We are already seeing some interesting opportunities from a price perspective. The technology sector as a whole is trading at historically low levels relative to the S&P 500 index and in absolute terms is on around 15x earnings. We have seen some severe sell-offs relative to the size of the fall in the market, but for me this provides opportunity and we believe it could be a good time to build positions in the technology space.
Following the Chinese technology sector delivering positive performance every month in 2017 and up a further 13% in January this year we reduced our exposure, although this area now once again looks more attractive. We are also less positive on storage right now purely on mid-cycle concerns; we do not believe there is anything wrong with the long term outlook. We will be looking closely at developed market indicators to inform our view on increasing exposure to the storage sector going forward.
Overall, with the infrastructure that is provided by the cloud and by network connectivity there is a significant opportunity across the area of productivity, in our opinion. Digitisation is proving to be a big area; there are so many simple things that can be improved easily by, for example, switching to online form filling to eradicate most of the mistakes made on hard copy forms. These simple productivity-improving steps are huge business, and in our view, only really just beginning.
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