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Global equities: where tech investors should be looking now

The indiscriminate tech sell-off is creating opportunities for investors willing to take a stock selection approach rather than buying the index, says Pendal’s SUE SCOTT

TECH was a stock market darling for more than a decade until last year — providing outsized returns on the back of transformational breakthroughs in personal technology, cloud computing and streaming entertainment.

But higher interest rates in 2022 triggered a sell-off across the sector as the current value of future cash flows reduced and some emerging companies found it harder to raise capital.

“The technology sector was bought indiscriminately on the way up — and now the sell-off is also indiscriminate,” says Sue Scott, a senior investment analyst in Pendal’s global equities boutique.

That means potential opportunities for investors willing to take a stock selection approach rather than buying the index, says Scott.

The rise and fall of tech as a sector disguises the fact it is made up of many different companies that operate in quite distinct markets.

One opportunity emerging in the selloff is the makers of analog semi-conductors, the sensors that collect data on real world events like sound, speed and temperature, she says.

“Analog semiconductors are the eyes and ears of an electronic device, taking real world signals and translating them into a digital message, enabling the device to react.

“As the world becomes more automated, analog semiconductors become more pervasive. The handset and PC market is only a subset of the broader market.

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“In a car, it’s the systems that tell you when you’re going to back into the car behind you and monitor cruise control. They also measure battery charge and discharge in electric vehicles.

“It’s air conditioners and household appliances. In sustainable energy. It’s the monitoring of electrical grids. And in healthcare it is medical devices.

“The other area that’s exploding is factory automation. Robots in factories need to know what’s going on around them and need to be able to act with precision.

“We love the diversity that these analog semiconductor companies offer, catering to multiple industry segments and not heavily reliant on any one industry subsector such as handset or PCs handsets for example.”

Analog semis are good example of how an index approach to technology misses the nuance in individual sectors, says Scott.

“Analog semis have a very long lead time and shelf life — once they are designed into a car, it’s not designed out the next year like for instance the digital semiconductors in a mobile handset may be.”

Semi-conductor companies to watch

Analog semiconductor leaders include Texas Instruments — the tech pioneer that made its name in pocket calculators and once made pop-culture icon the Speak & Spell — and Analog Devices.

“Both of them have proven historically that they can make smart acquisitions and integrate them well.

“They have adapted to changes in technology, they pivoted their businesses, deliberately moving away from the consumer market and moved their R&D focus into automotive and industrial.

“Importantly, they have their own manufacturing footprint, which has led to very strong margins and insulated them somewhat from the geopolitical risks associated with outsourcing manufacture.”

She says that despite the underlying structural tailwinds in the sector such as the growth in electric vehicles, in artificial intelligence, machine learning and the Internet of Things, that fundamentally the technology sector is cyclical.

“As long-term investors we want to own technology companies that manage their cyclicality through diversity of product and end customer or have significant barriers to entry.

“We like the comfort of owning companies that have the ability to record higher highs and lower sales lows , that  have the capacity to  invest through the cycle, have the balance sheets to grow their business when the opportunity arises and return significant amounts of free cash flow to their shareholders.”

Scott says technology is an important part of a well-constructed portfolio.

“Technology has the ability to transform other industries and it seeps into everything we do,” says Scott.

She points to transformation of companies like Deere & Co, the century-old agricultural equipment maker that now offers high tech services to farmers, and Caterpillar, the construction equipment maker that has become a world leader in autonomous mining vehicles.

“Deere can identify a weed in a crop and only spray that weed, think of the productivity gains and reduced costs for farmers,” says Scott.

“Caterpillar’s automated mine trucks are already out there in the Pilbara transporting iron ore.

“These are old industrial companies have been transformed by technology. That’s pretty exciting.”

About Sue Scott

Sue joined Pendal in 2016 as a senior investment analyst for the global equities team. She is responsible for global sector coverage of the technology, consumer discretionary and materials sectors. 

Sue has more than 24 years of experience in the finance industry. Before Pendal she advised global and Australian investors in Morgan Stanley’s Institutional Equity Division.

Pendal Concentrated Global Share fund is an actively managed, concentrated portfolio of global shares diversified across a broad range of global sharemarkets.

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Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

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Pendal is an independent, global investment management business focused on delivering superior investment returns for our clients through active management.

This information has been prepared by Pendal Fund Services Limited (PFSL) ABN 13 161 249 332, AFSL No 431426 and is current as at September 7, 2022. PFSL is the responsible entity and issuer of units in the Pendal Concentrated Global Share Fund (Fund) ARSN: 613 608 085. A product disclosure statement (PDS) is available for the Fund and can be obtained by calling 1300 346 821 or visiting www.pendalgroup.com. The Target Market Determination (TMD) for the Fund is available at www.pendalgroup.com/ddo. You should obtain and consider the PDS and the TMD before deciding whether to acquire, continue to hold or dispose of units in the Fund. An investment in the Fund or any of the funds referred to in this web page is subject to investment risk, including possible delays in repayment of withdrawal proceeds and loss of income and principal invested. This information is for general purposes only, should not be considered as a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking into account any recipient’s personal objectives, financial situation or needs. Because of this, recipients should, before acting on this information, consider its appropriateness having regard to their individual objectives, financial situation and needs. This information is not to be regarded as a securities recommendation. The information may contain material provided by third parties, is given in good faith and has been derived from sources believed to be accurate as at its issue date. While such material is published with necessary permission, and while all reasonable care has been taken to ensure that the information is complete and correct, to the maximum extent permitted by law neither PFSL nor any company in the Pendal group accepts any responsibility or liability for the accuracy or completeness of this information. Performance figures are calculated in accordance with the Financial Services Council (FSC) standards. Performance data (post-fee) assumes reinvestment of distributions and is calculated using exit prices, net of management costs. Performance data (pre-fee) is calculated by adding back management costs to the post-fee performance. Past performance is not a reliable indicator of future performance. Any projections are predictive only and should not be relied upon when making an investment decision or recommendation. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. For more information, please call Customer Relations on 1300 346 821 8:00am to 6:00pm (Sydney time) or visit our website www.pendalgroup.com

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