The Nub

The underwhelming performance of global technology stocks this year may have left some investors mystified as to how businesses that are supposedly the wellspring of a digitising global economy can so quickly fell out of favour. In periods of underperformance, investors may want to revisit the industry themes and stock theses underpinning their allocation to determine whether anything has changed. This question needs a qualifier: what has changed over a three to five-year time horizon? Our answer: very little.

Why Does it Matter

For much of this year, macroeconomic drivers have buffeted technology stocks as investors assessed headwinds such as inflation, rising rates and a potentially slowing economy. This has been a year of transition as the era of highly accommodative policy has come to an abrupt end. With interest rates rising, growth stocks aligned with technology-enabled, secular themes came under pressure as higher rates reduced the future value of their cash flows. Later, cyclical-growth technology stocks lost ground, held down by the possibility of a weakening economy. Over short periods, macro (for example, rates and inflation) and style (for example, valuation multiples) factors can cast considerable influence on equity performance.

What Next

In periods of upheaval, it is important to ask which business models will be stronger once we reach the other side. We believe it will be the secular growth companies that continue to increase productivity and convenience across the economy. As with other sectors, the economic cycle, rates and inflation matter to technology. The combination of excess liquidity and waves of enthusiasm can push up valuations to levels not supported by fundamentals. Both technology sector management teams and investors are in the same boat when confronting these risks, meaning they should maintain focus on how technology is increasingly used and how that translates to delivering attractive financial results.