Issue date: 2020-06-30
The spread of the coronavirus (COVID-19) has caused market volatility and possibly economic downturn and the technology sector is no exception. However, we are seeing the transformations of corporate operations and people’s daily livings with the modern technological advancements.
Long Term US Economy Remains Healthy
While it’s clear that the United States will presumably fall into recession (defined as two quarters of negative GDP growth), we see this sharp downturn as temporary. The long economic expansion was clearly in the later part of the cycle. There is no doubt that the impact of economic shutdowns on employment and consumer spending will be significant, especially in sectors like travel, hospitality and traditional retail business. We’ve seen opportunities to initiate or add to positions in what we consider to be high-quality, long-term growth companies that are well-positioned for the future, for example, technology sector being more resilient to market volatility.
Digital Transformations in Daily Livings
We believe that all businesses will need to invest more in digital technology to better understand and service their customers and partners at a competitive cost. We invest in the highest-quality leading and emerging digital disrupters and those high-quality technology vendors helping businesses digitally transform.
A more rapid adoption of cloud-based applications for enterprises, and even smaller companies may look for suitable tools to allow employees to work remotely. Companies with software that facilitate virtual meetings are also potential winners as traditional face-to-face interactions move into online environments.
Sector Valuation Remains Reasonable
Market valuations have peaked in early February (Chart 2), and the technology sector has been a relative outperformer during this period (Chart 3). We are seeing good opportunities across the sector now as many of the highest quality growth companies offer good discount to their long-term fair value.
Potential Risks to Consider
Aside from COVID-19, the key risks we are currently monitoring include a focus on aggregate demand. While companies highly leveraged to the digital transformation theme have been reporting solid fundamentals, which we expect to continue, results from legacy technology companies (including personal computers and “on-premise” data centre infrastructure) suggest that overall enterprise technology demand is slowing a bit. If investor expectations come under pressure, the share prices of many higher-valuation businesses could come under pressure, even while their business fundamentals remain intact.
Digital Transformation Is Supporting the Technology Sector
We remain focused on the highest-quality businesses aligned strongly with the Digital Transformation theme and its associated sub-themes: artificial intelligence (AI) and machine learning, cloud computing, data analytics, IoT (internet of things), cybersecurity, software as a service (SaaS), e-commerce, fintech and digital payments, digital advertising, customer insights, collaboration and workflow, DevOps (software development and IT operations), 5G network communications and more.
As long-term investors, we believe that this pandemic will ultimately pass and that the economic damage, while severe in the short term, will subside as consumers emerge looking for new opportunities with pent up demand for goods and services.
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