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Views on technology stocks sell-off
12 Aug 2024
By Hyun Ho Sohn, Portfolio Manager
Surie Radhika, Investment Director
We have seen increased volatility in markets as a confluence of changing expectations on economic growth, interest rates and mega-cap technology earnings in the US (combined with an unwinding of a Japanese yen carry trade in Japan) have shaken investor confidence. Market volatility has been exacerbated by the unwinding of a crowded trade, hedge fund de-risking and passive moves.
Looking at technology sector specifically, we need to be careful in reading into earnings, because at this point they could represent a lagging indicator. Having said that, while traditional IT spending has been weak, most mega cap earnings reported so far have been fine, with these companies still showing strong year-on-year growth. Areas like hyperscale cloud stand out as they continue to see resilient demand. In contrast, cyclicals (broad-based semiconductors) have disappointed against market expectations of a recovery. Many semiconductor names which became overpriced during the AI-sentiment driven rally, with cyclical and geopolitical risks ignored then, have corrected since. Overall, the fundamental picture does not cause alarm.
In fact, the blanket selling by market participants has opened up interesting investment opportunities for those that can take a disciplined, long-term active view. Whilst most of the market fixates on the rotation and short-term earnings impact from macro factors, those taking a long-term view have opportunity to invest in companies with durable long-term earnings potential. We are seeing opportunities emerge in such businesses and more specifically areas like mid-cap software that had been de-rated as well as semiconductors that have already gone through a massive de-stocking cycle.
While market expects the massive AI infrastructure build- out to continue without any speed bumps, we feel that there are underappreciated risks in terms of the magnitude and pace of generative AI adoption. Therefore, we avoided expensive semiconductor names and prefer more diversified and value-oriented names in the segment. We also continue to see value in digitalisation leader in ‘old economy’ areas. Overall, we believe that investors should be constructive on AI, but in a way that fully weighs the risks as well as the rewards involved and the phasing of value creation. Technology themes will likely broaden beyond AI from here, and we see strong tailwinds for cloud infrastructure and software, as well as attractive valuations in analogue semiconductors, IT services, and communications equipment.
