Large-cap technology stocks have performed strongly in 2023, but investors are divided about the prospects for the sector from here.
James Dowey, who manages a range of technology-focused funds at Liontrust, says we are “at the start of a new cycle in technology”, as a consequence of both fresh technology coming to the market and of the behaviour of existing technology companies.
He says that while equity markets have generally struggled over the past year, “technology has been a bit of a bright spot. But the reality is that for many of the largest companies, the share price gains have been a function of earnings growth rather than just multiple expansion.
"For example, multiple expansion accounts for 2.5 percentage points of the share price gains of technology companies over the past decade, which is not just a small proportion of the total gains, but also not radically different from the ratio for the FTSE 100 in the same time period, which is 1.9 percentage points.”
Dowey says many of the largest technology companies also screen positively when it comes to achieving return on equity from the investments they make, and feels this qualifies many such businesses as quality stocks, rather than cyclical or speculative businesses, which he says if often how they are portrayed.
He feels one of the factors that highlights the change in the investment profile of such businesses is that “they have already had their recession, they had reduced workforces substantially, cut costs, and while recession has been much talked about in the wider economy, it hasn’t happened yet, the CEOs of tech companies have largely behaved like CEOs are expected to behave.”
The notion that the largest tech companies have evolved into more reliable businesses is not completely disregarded by David Hogarty, senior portfolio manager at KBI Global Investors.
He says in the current environment, “the quality of a company is increasingly important as economic conditions may worsen.
"The issue I have is that many of these companies are more cyclical in nature than the market presently realises, Meta, for example, which is the company that owns Facebook, generates a lot of its revenue from advertising, and advertising is a cyclical business – I’m not sure the market fully appreciates this cyclicality.
"But generally speaking, we think a lot of the companies are good quality, but it’s about valuation.
"For example, analysts expect Apple to grow its earnings by 7 per cent next year, and while 7 per cent is OK, its actually the same forecast as for the FTSE 100, yet the FTSE 100 is far cheaper, so as an investor you are paying less for the same earnings growth with the FTSE.”
It is for this reason Hogarty is overweight UK equities right now, though he does have an investment in Microsoft.
