Written By: Neil Robson
Head of Global Equities
Columbia Threadneedle Investments

& Moira Gorman
Client Director
Columbia Threadneedle Investments

Neil Robson and Moira Gorman of Columbia Threadneedle Investments discuss the continued expansion of global growth, fuelled significantly by technological advances, and predicts moderate growth in equities throughout the coming year

The global economy, with the exception of the UK, is going through a period of rare synchronised expansion. Corporate profits are rising, trade is expanding and growth is robust in the US, Europe and beyond. One of the key drivers of returns during this time has been the technology sector.

Technology has been overweight in our global portfolios for about seven years. Previously, the sector was hardware-focused and, as a result, dependent on cycles that lasted from around three to five years. Now, however, technology is infiltrating every single sector and no longer represents 15% of the marketplace as it once did.

In the US, home to globally recognised tech names such as Facebook, Amazon, Netflix and Google (now known as Alphabet), we expect secular “megatrends” in technology to support greater earnings growth. The $350 billion semiconductor industry, for example, is poised to grow by 2-3x global GDP, versus 1x historically, as chipmakers shape and benefit from multiple megatrends in technology and society.

The cloud economy is creating enormous need for the cost-effective acquisition, storage, communication and analysis of data, and its conversion into insights and actions. Semiconductors are aligned to lead these changes, driven by Moore’s law of a virtuous cycle of cheaper, faster and smaller. Trends in cloud computing, artificial intelligence, connected cars, gaming, “always on” unlimited mobile broadband, 5G wireless and the “internet of trillions of things” could collectively add nearly $100 billion in addressable opportunity over the next five years. The technology sector is outgrowing the S&P 500 by 5% per annum, but while the US technology sector is mainly exposed to these trends, the whole ecosystem will benefit. For example, REITs exposed to data centres that will grow and expand with demand.

Technology is key to the world we live in, and is a crucial component of the changes that are taking place across global economies. However, many of today’s technologies are disruptive to existing business models. One of the most obvious would be the retail sector and the degree to which the high street has been disrupted by ecommerce. Going forward it will be the extent to which cars are disrupted as we move from fossil fuel-powered vehicles to electric vehicles and, ultimately, autonomous vehicles taking over from people. As an investor we need to have a view as to whether these trends will come to fruition, and if so who the winners and losers will be.

We must also remain vigilant about identifying which sectors might be disrupted by new technologies. Disruptive technologies are going to disturb the business models of the traditional companies in which we currently invest, but on the positive side, if we can identify those technology companies which possess the value-add for the next generation, then it’s likely they are going to be the winners.

One of the key themes within technology that we have seen over recent years is the “gorillas” becoming the dominant companies, such as Amazon and Alibaba leading ecommerce in the West and China, or Google and Baidu doing the same regarding search engines. These companies have so much power because they generate huge amounts of cash, which is then reinvested in their own companies or used to acquire new businesses.

What can stop them? There are three things: one is that they “blow up” through bad management; two, they get regulated away; or three, a new technology usurps them.

The latter point is often dismissed by those who believe the giant technology companies own all the smaller start-ups, and thus the idea of a disruptor itself being disrupted is not valid. However, a new disruptive technology may be a completely different technology about which we haven’t even thought. Turning back the clock, who would have conceived that Google would be in the position it is in now? The disruptors can get disrupted. Yet despite these threats, we believe technology is a theme that will continue to run in 2018, and we will continue to seek companies with a competitive moat.

When we look at technology valuations we recognise that many technology giants are growing quickly and therefore attract a higher valuation. However, valuations of the technology sector are not extreme. The US IT sector still looks reasonably valued on a forward price-to-earnings multiple basis relative to the market. On a price-to-book measure the sector is looking more expensive, but one could argue whether historical P/E is a relevant metric given the sector is becoming more software- and services-oriented in the US. Moreover, on an equity risk premium basis the US looks compelling. While the past 10 years has seen the historical US equity risk premium exceed that of other developed markets, this likely justifies its higher valuation premium. Over the long term, the risk premia of the US and Europe ex-UK is about equal and exceeds that of Japan and the UK.

Technology has been one of the key drivers of a rare period of synchronous global growth. However there is a concern that at some stage over the medium term, an event will occur – whether it is geo-political, a threat to globalisation, or of a monetary policy nature – that will disrupt markets, but short term we do not see it happening.

To some extent it is easy to see rising inflation from here on in, but in a way technology itself has played its part in keeping it low thus far by improving efficiency. Indeed, despite traditional measurements marking productivity as persistently low, it is difficult to determine the accuracy of these, given that technology has led to a variety of products that were not available 10 years ago.

With or without the above, the macro-economic backdrop remains supportive for equities, and in 2018 we envisage prices rising moderately – driven by continued strong fundamentals and earnings growth, the latter supported by secular “megatrends” in a technology sector annually outgrowing the S&P 500 by 5%. There is unlikely to be much upside in credit markets because valuations are too rich, but there is opportunity if you choose it well.

With an absence either of monetary tightening or of large-scale fiscal changes on the horizon, Asia, Japan and Europe appear to be the best areas to take cyclical exposure to global growth. However, with geo-political and economic risks on the horizon, 2018 will require the skill of active managers to manage portfolios prudently and find technology opportunities that deliver consistent returns.


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Published: December 1, 2017
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