Global Technology strategy - April 2023
Profit taking seen despite most companies reporting as expected or better first quarter results
- The technology sector underperformed the broader equity index in March
- Positive contribution from megacap holdings, weakness in semiconductors
- Any uplift in business activity is likely to bode well for operating margins and profitability
During April, the MSCI World index rose 0.2%1 . The technology sector underperformed the broader equity index with the MSCI World Information Technology index declining 1.8%. [All index returns provided in GBP].
The concerns within the banking system continued into April, culminating with the collapse of First Republic Bank at the end of the month creating an overhang across the equity market whilst the risk of a breach of the US Governments debt ceiling has become an additional cause of concern for market participants. Despite technology companies reporting mostly as expected or better first quarter results the sector has been subject to profit taking and has been weak during this risk off period.
Portfolio positioning and performance
Megacap holdings, Alphabet, Apple and Meta all contributed positively during the month, the latter delivering a robust set of results and its share price climbed higher.
Elsewhere, we saw resilient performance from Amadeus, the company that processes transactions for the global travel and tourism industry. There wasn't any company specific news over the month but travel data continued to be robust, as evidenced by payment company Visa who reported solid results and continues to see a recovery in cross-border travel transactions. We also saw positive performance contribution from our payment names Global Payments and Fidelity National Information Services.
Performance was mixed within our cybersecurity holdings: Tenable provided a disappointing outlook which cast uncertainty over this group of stocks, however the exception to this was our investment in UK company Darktrace who provided an encouraging business update that was well received by the market.
After a strong start of the year, our semiconductors were generally weak over the month. Silicon Labs (Internet of Things chips) results were in-line with expectations but inventory destocking and demand weakness resulted in guidance below consensus. China demand was a headwind but management noted encouraging signs of a potential recovery. Elsewhere, our investment in Wolfspeed (a leader in Silicon Carbide based chips) fell in value after the company announced that the ramp at its new Silicon Carbide wafer production facility would be slower than previously anticipated. We also saw share price weakness in Qualcomm, Lattice Semiconductor and Microchip Technology.
Whilst US video games developer Activision Blizzard performed strongly last month after the Competition Market Authority in the UK gave an update on its investigation of the proposed acquisition by Microsoft, narrowing its scope of concerns regarding the deal, it then subsequently rejected the deal causing the company’s share price to fall.
During the month we sold our investment in Fidelity National Information Services (FIS), the provider of banking systems and payment services due to a challenging customer environment and a changing competitive landscape.
We also sold our investment in NXP Semiconductors, whilst the company has delivered a good return, we are mindful that there is expected to be a more challenging period in their end markets (automotive and industrials) and have exited the position.
The environment remains challenging for investors as uncertainties over inflation, rising interest rates and now a banking crisis raises the concerns over the overall health of the economy.
However, there have been some encouraging signs of better times ahead too. Within digital advertising, after four quarters of disappointing results, Meta Platforms, saw an uplift in demand resulting in better-than-expected revenues that was extended into their guidance for the second quarter.
We note that advertising budgets were cut early during the current economic downturn, with the Russian invasion of Ukraine a trigger point in the aspect of this discretionary budget item. Therefore, to see some aspect of improvement is a positive signal.
Whilst we expect macro-economic and geo-political events to continue to be the main drivers of sentiment within investment markets, we expect that some of these pressures might begin to abate as the current interest rate cycle appears to be closer to a peak given recent economic readings.
Many technology companies have been cutting costs and overheads, so any uplift in business activity is likely to bode well for operating margins and profitability.
As an aside, April marked the 50th anniversary of the first mobile phone call, when an engineer at Motorola, rang a rival at Bell Laboratories, to inform them of their success! As visionary as those engineers were, it is unlikely that they would have predicted the phenomenal global sensation the mobile phone would eventually become. In 2022, it is estimated that over 1,400 million handsets were sold worldwide.
No assurance can be given that the Global Technology Strategy will be successful. Investors can lose some or all of their capital invested. The Global Technology strategy is subject to risks including; Equity; Smaller companies; Currency; Industry sector or region; Changing technology; Emerging markets; Liquidity.
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