Selective investments in technology to provide best price returns – Allianz’s Price
Walter Price, manager of the Allianz RCM Technology Fund, comments on the outlook for the technology sector in 2014.
Equity markets in the developed world have done exceedingly well this year as investors have reacted positively to improving visibility on a number of the economic and political challenges impacting the global economy over the past few years.
The returns in the technology sector have been relatively less spectacular this year as soft sales in the traditional software, hardware, and IT services segments weighed on some of the largest technology companies. We believe there are two reasons for this: 1) increased scrutiny over capital investment and 2) managements are contemplating their transition to on-demand, “cloud” solutions.
We expect the threat of the cloud to traditional technology companies could accelerate in the coming year amid friendlier macro conditions and high-profile deployments across larger corporate and government customers. Because of the increasingly competitive environment in the cloud, we believe selective investment in established leaders in the space will provide the best potential price returns.
At the same time, we are also looking at certain technology incumbents making compelling progress on their “as-a-service” offerings as wells as components makers, previously thought to be casualties of languishing PC sales, which are finding good demand from the expansion in data centers needed to store data and deliver cloud services. These companies have more reasonable valuations that some of their pure-cloud counterparts and could see significant re-ratings.
Despite the apparent weakness in other areas of the technology sector, consumer internet companies have done exceptionally well this year as they have taken the first steps to more effectively monetize, especially on mobile. These companies are introducing a whole new way for businesses and advertisers to engage with customers in higher return formats. We believe there is a long runway for this process to unfold and expect this group to generate strong returns over the long-term.
Other growth areas in technology we are positioning for are ancillary beneficiaries of mega-trends like cloud and mobile computing. In particular, we believe companies in the wireless communications and security solutions spaces could do well as companies and carriers build out their networks. Another focus is the transformation of health care through technology in light of the ongoing implementation of the US’s Affordable Care Act. We are keeping a keen eye out for companies providing solutions that help consumers personalize and be more informed when it comes to managing their own health.
We acknowledge that risks in the equity markets are still present in the form of uncertainty regarding global monetary policy as well as the potential for stalled policy or economic progress in major economies. Still, we believe the fundamental improvements in the global economy and growing and momentum of major trends could set the stage for the next secular bull market in technology.