AI powering technology growth
Given tech stocks’ impressive run over recent years, speculation is gathering as to if investors can continue to access this theme and where they should be looking to do so
Questions over the future of tech have been raised in 2024 simply because of the significant growth these stocks have recorded in recent years. However, State Street Global Advisors' senior equities strategist, Rebecca Chesworth, believes a stabilisation of the sector is occurring.
"We know institutional investors are overweight in tech at the moment, and are starting to take profits, but there is no panic," said Chesworth. "The market has broadened out and is very healthy. It's not all about tech anymore, and the performance has moved beyond. Tech ETF flows are still the highest, but investors are seeing a turnaround, and people return to industrial and energy ETFs."
The rise of AI
Yet no discussion about technology investing in 2024 would be complete without artificial intelligence (AI) and the panellists agreed about the critical role this was now playing.
"This is going to make a huge difference to how we invest, how we do our job, and yet we are just narrowly defining it as ‘tech'," noted Chesworth at the roundtable. "For now, tech is how you monetise the AI because it does have the necessary hardware, software, chips, cloud storage, etc. There is only one sector that solves all those problems for you."
AI is going to make a huge difference to how we invest and yet we are just narrowly defining it as ‘tech'
Rebecca Chesworth, State Street Global Advisors
Olivia Wingrove, portfolio manager at LGT Wealth Management, attests to this and is more confident about the wider themes driving technology stocks such as AI. Explaining her firm's fund-of-fund approach, Wingrove said she is encouraged by the potential of this and the fact it is now bound to just seven mega cap names.
"We were nervous, and taking profits, when we felt the Magnificent Seven alone were driving returns, or specifically any company that had any relation to AI, which is where you get concerns," recalled Wingrove. "For us, it's a lot about thinking about those long‑term mega trends.
"And from our perspective, it has been really about focusing on the quality under the bonnet, looking at the companies that our managers hold."
The applications of AI are vast, and something panellist Valeria More, head of equity research at Close Brothers Asset Management, sees as extremely valuable in other sectors such as healthcare: "We will see amazing contributions for the detection of cancer and in aging that really enhance the human capabilities, because they put the patterns together and create meanings."
Comprehending just what kind of future AI can facilitate is a challenge though. Panellist Lucyna Kupczak, portfolio manager at Vintage Asset Management, equated this to the watershed creation of smartphone technology.
"We are in a stage where it is really difficult to imagine how much AI can impact our lives," said Kupczak. "If you look back 20 years to when the first smartphones were invented, companies like Uber and Spotify would not exist without that. AI will provide incredibly wide opportunities and possibilities."
However tempting the prospects of AI may be for investors, it is still debatable how these can be accessed via tech stocks in their current state. AI hype is further adding to lofty tech valuations and, given the need to invest in quality and fundamentals, this means there is no avoiding the challenge of thorough research according to panellist Kasim Zafar, chief investment officer at EQ Investors.
"The trouble is everyone is focused on quality, so it tends to get a little bit more expensive," said Zafar. "It's a challenge to find quality value, and there are only a handful of ways that you can do that."
This is partly why tech is still dominated by the Magnificent Seven – an "unhelpful concept" according to State Street's Chesworth – but Max Newman, equity specialist at Atomos Wealth, said the space is evolving: "Tech is improving, and diffusion is coming, but it still has been extremely narrow.
"There are various companies with different models monetising at different stages. We are now seeing that seep through into IT services, Accenture booking a huge amount of training and consultancy revenues. There are other case studies, but there is still a lot to go for within tech and seeing that broadening out."
Getting tech access right
Among our panel, opinions were split about how they should play tech in 2024. Atomos Wealth's Newman told the panel how he took confidence from how big tech has performed despite high rates, indicating the strength of these names: "It's the non-profitable, lower quality end of the market that has been really impacted quite heavily.
"Has it gone too far? Tech is a structural outperformer. If you are going to take a view, I would be neutral. It's important to break it out and get a bit more granular at this stage."
This granularity can mean looking further down the market cap spectrum. Moore said there are many overlooked smaller tech names in the US that could benefit in the next stage of a cycle.
"There are smaller companies in the US I would be more interested in because they can participate in the recovery of the industrial cycle to the automation," she said. "Investors want those cyclicals that benefit first, but the recovery is going to be a bit shallower because there was a normalisation rather than a big dip. Companies with a strong competitive advantage and the technological knowledge will become important again."
There was consensus in the panel about using specialised thematic managers to access tech, or at least the themes it supports. LGT's Wingrove advocated the use of a dedicated tech manager, adding: "You want to be able to benefit from that tech rally, when you see it, but you also want to be cognisant of the risks that come with that and, of course, the valuations."
In agreement was EQ Investors' Zafar who cited the use to thematic funds to augment existing equity exposure: "We have been invested in an AI fund for about the last three years, which has been an absolute dream – [this] has just around 50% exposure to IT. There is a huge number of other exposures there."
Marketing Communication for professional investors use only. Capital at risk. The value of investments may go up or go down and past performance is not a guide to the future. This article has been issued in conjunction with State Street Global Advisors Limited, authorized and regulated by the Financial Conduct Authority, 20 Churchill Place, Canary Wharf, London, E14 5HJ. The views and opinions expressed are those of the speakers and do not necessarily reflect the views of State Street Global Advisors Limited. Further information on www.ssga.com
