The dogs bark, the caravan moves on

It wasn’t the happiest of new years for technology investors. Fears of an approaching rate hike on the part of the US Federal Reserve appear to have spooked some investors and led to a wide sell-off in the early weeks of 2022, in what many have already criticised as being an overheated market.

Undoubtedly the pandemic has led to some curious behaviour on the part of investors, particularly in the US and certainly with companies promising some sort of world-changing technology, whether that be in the cryptocurrency sphere or electric car sector.

Combined with a decade-long period of meteoric growth, this has led to suggestions the tech boom may be over. And yet, looking beyond short-term phenomena and pockets of speculative behaviour, many of the dynamics that have supported the tech sectors’ outperformance remain in place. Indeed, many of them even seem to be becoming more pronounced.

These are all things the team at Allianz Technology Trust (ATT) is cognisant of and, although they don’t try to game macro trends with their investments, many of the positions they’ve taken look set to benefit from them.

The chips are down

One of the more notable themes in this regard has been the growth of the semiconductor industry, with four of the trust’s 10 largest holdings at the time of writing focused on the sector. Global semiconductor sales are estimated to hit a little over $600bn this year, more than double the amount the industry generated a decade ago.

There are no guarantees this will continue but it’s certainly hard to envisage a major slump in demand for computer chips in the near future. That’s because items powered by semiconductors are now so ubiquitous.

It’s been easy to see this over the last 12 months because of the shortage the industry has faced. As you’d expect, computers and mobile phones were impacted as a result, but so too were disparate everyday bits of hardware, like toasters, washing machines, and cars.

Shortages and supply chain problems are likely to fade away along with the coronavirus, even if it’s hard to say exactly when that will be. But there is reason to believe the semiconductor industry will continue to grow as more and more of the things we use in our day-to-day lives have some type of chip implanted in them.

For investors like ATT, there is also a reassuring moat around many companies in the sector. Making or designing chips requires a lot of money and technical expertise, so the odds of a newcomer setting up shop and snatching away market share is less acute than in other industries.

More hackers, more investment

Another area of the market that seems likely to continue playing an important role in our lives is cybersecurity. Spending on protecting digital information hit over $150bn globally in 2020, a number that’s projected to reach over $350bn by the end of this decade.

Such growth reflects the ever-increasing amount of sensitive data we now store in the digital world, whether it be our bank details or medical history. And just as we’re moving more of our personal details online, so too are criminals making more frequent efforts to steal it. Cybersecurity group PurpleSec has found that computer malware infections rose from 12.4m in 2009 to almost 1bn in 2018.

Several companies in the ATT portfolio look likely to be able to help counter these sorts of attacks. One is Zscaler, a US firm that provides cybersecurity services for cloud products, something that a growing number of companies use. The company is currently one of ATT’s largest holdings.

There’s also Okta, a slightly different business that provides identity verification tools to businesses. Developers can also use the company’s technology to put their own cybersecurity tools in the products they’re building.

The cybersecurity sector has arguably been more subject to some of the speculation we’ve seen in the market compared to semiconductor businesses, which typically have proven track records of profitability. But the ATT team believe these higher valuations will prove themselves in the end and that the businesses will ultimately deliver the sorts of margins we’ve come to expect from Silicon Valley.

Automated workers

It’s a somewhat similar story with another trend the trust has a level of exposure to – the growing shortage of labour across the globe, which may lead to a 43m dearth of workers by 2028. Historically periods like this have been beneficial to the technology sector as the proportion of GDP spent on finding solutions to the problems created by a lack of workers rises.

In the current decade, it’s plausible that will take a couple of avenues. On the one hand more tools that can help companies automate processes and, on the other, software they can use to monitor workforce performance as more staff work remotely.

Square, an ATT holding, fits into the former category. Although its predominantly involved with payments, the company also seeks to automate processes for restaurants, shops, and other businesses. It also provides customers with business management systems.

Asana fits more into the workforce category as it provides software to businesses aimed at managing work projects. Employees can manage tasks and companies can get a better idea of what their staff are doing when they’re not in the office.

The trends are still there

These sorts of trends are, of course, no guarantee of success. A rising tide isn’t likely to lift your ship if it has a large hole in the bottom of it. Similarly, a poor quality company won’t perform well for long, even if macroeconomic conditions are working in its favour.

But the idea that, in the case of the tech industry, the trends that have given it a boost are dissipating seems false. Many are still there and look to even be increasing in impact, rather than the opposite.

True, there may be bumps along the way, like the recent sell-off, but to take one incident and declare it indicative of a long-term trend is to be a bit like the apocryphal dog barking at the caravan. It can make as much noise as it wants but the caravan will just keep moving.

Login to read the full article...