Thursday, 18 October 2018 07:07

Market commentaries on Global Markets by Quilter Cheviot Investment Management

Written by Ben Barringer

By Ben Barringer on the sell-off in the technology space

 

Volatility in the technology sector has grabbed people’s attention, but to understand what’s going on, you need to break down the sector and look at it from the bottom up.

First, the semiconductors, which have seen the sharpest sell-off in recent weeks. Semiconductors are a cyclical business by nature, and are more closely tied into the industrial cycle than other parts of technology. The order books of semiconductors became a bit over-optimistic recently, as their customers placed larger orders than necessary to ensure they got enough product to continue their own operations.

Inventory corrections tend to last around 6-9 months for semiconductors, and we’re probably around four weeks in. Given their share price reaction, we may be nearing the bottom now.

Second up are the high growth software names. Valuations in this area have become a bit exuberant in recent months. Given the recurring nature of software revenues, investors have aggressively expanded multiples, meaning share prices have got ahead of actual company growth. A re-rating seems sensible if growth opportunities remain intact.

Last, the cloud providers. These are the likes of Amazon Web Services, Alphabet (Google) and Microsoft, all of which benefit from structural growth in cloud computing. They’re more insulated from a sell-off than cyclical businesses like semiconductors.

Valuations are likely to consolidate as we head into the earnings season. We expect earnings to be good but for investors to scrutinise outlook statements to a greater degree than in the past few quarter. The long-term opportunities behind these businesses are not in doubt however.

There will be macro concerns driving the sell-off too, but for investors to understand this volatility fully, they need to understand that not all ‘tech’ stocks are equal, or exposed to the same structural opportunities.

Investors should remember that the value of investments, and the income from them, can go down as well as up. Investors may not recover what they invest. Past performance is no guarantee of future results.

Any mention of a specific security should not be interpreted as a solicitation to buy or sell a specific security.