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Focus: Paul Wick (Columbia Threadneedle Investments) on the outlook for Technology
Calendar04 Feb 2022
Theme: Focus

Paul Wick, manager of the Threadneedle (Lux) Global Technology fund on the outlook for Technology

Fundamental trends that drove the returns in the last years were still important in 2021: 5-G wireless network buildouts; faster wireless and wireline network speeds; growth in E-Commerce, Software AG as a Service, and Cloud Computing; electrification of automobiles; more sensors on cars; Artificial Intelligence. Of course, some of the beneficiaries of the COVID pandemic struggled as the unique circumstances of “work and shop from home” gave way to a return to normalcy: Zoom Video, Amazon , Chegg, and Peloton, were among several high-profile companies that had disappointing results and stock performance during 2021.

As we enter 2022, we are less optimistic about the Tech sector for a few reasons: 1) inflation has been surprisingly strong, and central banks are likely to respond by tapering their bond purchases sooner, likely putting upward pressure on interest rates; 2) Tech stocks have done exceptionally well for three years; historically, the group has tended to consolidate after a long period of outperformance; 3) the supply of newly public companies has grown enormously with the tidal wave of SPACs and traditional IPOs in 2021; as these companies unlock their shareholders to sell shares, the supply of stock on the market will continue to grow; 4) Valuations are at all-time highs for most sectors within Technology, particularly in Software AG .

Conversely, I’m optimistic that Enterprise-focused sectors like PCs, printers, networking and storage will remain strong into 2022 as COVID fully recedes and the global economy returns to offices. We are also optimistic on the Memory industry, as DDR 5 increases DRAM die sizes and demand for both DRAM and Flash look strong.

The main market risks to Tech in 2022 are: rising interest rates that could impact high valuations of many Software AG and Internet companies; geopolitical conflict, particularly a war in Taiwan or Ukraine.

It’s not so much Tech stocks that are negatively correlated to interest rates; it’s long duration equities in general. So, fast growing but less profitable companies in Software AG , Internet, Biotech, and Medical Devices and Services have performed the worst as rates have crept higher. On the other hand, Tech “value” and “growth at a reasonable price” stocks with shorter duration / higher near-term profits have held up well despite the rise in interest rates.

Which technology industries are you constructive on and those that you are likely to avoid?

We remain quite optimistic about the Memory chip industry and hardware companies. We are especially excited about Rambus, Western Digital , Micron Technology and Smart Global Holdings in the Memory / Storage sector, and we are also positive on Hewlett Packard , Dell and Poly in the hardware sector.

How do you view valuations in the technology market?

Not surprisingly, we are worried that valuations don’t leave us with as much upside as we’ve been accustomed to the last few years. Fortunately, most of the companies we are invested in are “short duration” companies that have meaningful current profits and cash flow, as opposed to “long duration” companies whose cash flow is many years in the future.

Your portfolios are underweight the FAAMG stocks relative to broader market indices and the technology category averages – what are your expectations for these mega cap technology stocks in 2022?

We are cautious about the outlook for Facebook in 2022 as the company is hurt by Apple ’s IDFA changes, forcing it to spend billions on reinventing itself as a “Metaverse” play. We expect MSFT and GOOGL fundamentals to remain strong in 2022, but stock performance may slow as a result of the law of large numbers. Apple has tough comparisons in 2022 with a very strong 2021; we expect modest gains in Apple in 2022. Amazon shares may see a stronger year in 2022 after a flat 2021. If I had to rank them, it would be GOOGL 1st, MSFT 2nd, Amazon 3rd, Apple 4th and Facebook 5th.