Portfolio Manager Hyun Ho Sohn provides an update on current market conditions, in light of rising US-China trade tensions and the resulting selling pressure on more cyclical stocks.
The market has slipped back into ‘risk off’ mode, with increasing tensions over trade between the US and China. Semiconductor companies in particular are facing selling pressure given the escalating row over Huawei, with the NASDAQ underperforming significantly yesterday. The US government appears to be leaning on US firms (semiconductors and Alphabet) to not work with Huawei. Technology companies remain cautious given the macroeconomic situation, though long term growth drivers for the sector remain intact.
US-China relations
Growing antagonism between the US and China is evident; many firms had previously been able to rely on relatively easy, open trading relations between the two countries, which enabled growth of US-China supply chains. Apple in particular now faces risks of retaliation by the Chinese, with noise on twitter yesterday around temporary tariffs on Apple products (the stock selling off on the day). The latest US tariffs announced will impact hardware firms in particular. The challenge for Apple is that the iPhone supply chain is too specialised and too big to move from China. With the exception of a plant they are just opening in India (more used for lower end iPhones) there is very little scope to relocate.
Trump and Xi Jinping may agree a deal, as both sides have too much to lose from a protracted trade war. However, China still has a long term commitment to increasing its technology independence by reducing reliance on foreign components and service providers. Many commoditised components they will be able to build relatively easily. But in building its semiconductor capabilities for example, it remains reliant on outside expertise from semiconductor equipment makers. KLA-Tencor and Lam Research are both fund holdings in this space which offer good exposure to China’s semiconductor buildout. Regardless of what happens in the trade dispute, KLA is very well placed given Intel’s double-ramp of 10nm and 7nm processors, and the likely competitive response from TSMC. Lam Research is another victim of the sell off in cyclical areas, but which is benefitting from structural growth drivers, with the company of the view that memory supply/demand will come into balance by the end of this year, setting it up for a return to growth in 2020.
Buying the dip
Current market conditions offer a good opportunity to add to positions in cyclical firms with structural drivers. Globally we are seeing secular growth in investment in data centre capacity, driven by investment from platform firms (Google, Amazon, etc) looking to buildout new technology capabilities, with competitive intensity between them continuing to rise; the data intensity of new applications; and ‘edge computing’: the increased need for construction of data centres close to end users, given performance/latency issues and the growing push for data sovereignty and privacy from companies around the world, with the associated need to keep data in close proximity. However, heavy above-trend-growth investment in data centre capacity last year means we may see a few quarters before further significant levels of investment kick in. 5G exposed businesses are another promising area; the fund holds Marvell Technology which has an emerging opportunity in 5G, with infrastructure starting to move into production. Volume may not follow until 2020, but this will start to impact multiples in 2019. I am also continuing to add to positions in gaming companies, which are benefitting from widening demographic participation rate and monetisation opportunities in new technologies like streaming gaming.
Other portfolio themes
Other key themes in the portfolio remain consistent over time. The portfolio offers exposure to development of autonomous and electric vehicles – both end vehicle producers like Tesla as well as components providers such as Infineon Technologies, which is a leading producer of automotive power semiconductors and sensing technology for vehicle radars, and Nuance Communications, which makes voice recognition software. Structural global growth in internet usage and e-commerce persists, with a significant increase in mobile internet traffic. Opportunities include established leaders such as Alphabet and Facebook, as well as Asian names such as Yahoo Japan and Naver. Within the e-commerce space, I am also positive on travel websites like TripAdvisor – which experienced a strong turnaround in results last year. The portfolio offers exposure to AI development through semiconductor makers like Intel and NVIDIA which produce chips that are integral to AI and robotics development, as well as companies like Alphabet which are aiming to incorporate AI into business decision making and new services for consumers.
I am also investing in IT services firms like IBM that are assisting businesses with their digitisation efforts, as well as enterprise software providers like SAP and Oracle: firms across industries are looking to become more efficient and gain new insights into their customers and business processes via digitisation. Industrial firms are looking to digitise and further automate production processes, with the help of data analytics.
Rolling 12-month returns, net of fees, EUR (%)
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Source: Fidelity International, 30 April 2019. Performance is for Fidelity Funds – Global Technology Fund A-EUR share class. Comparative Index: MSCI ACWI Information Technology (N). Performance is chain-linked, net of fees in EUR terms. Basis nav-nav with gross income reinvested in EUR. Data shown does not take into account any initial charge that may apply. Totals may not add up due to rounding.
Hyun Ho Sohn
Portfolio Manager
Portfolio Manager
