Global technology: Softening the cyclical while shaping the secular

What themes do you anticipate to most influence technology in 2024?

Denny Fish: The themes that are likely to be center stage are twofold. One is the idea that the macroeconomic backdrop is getting more difficult because of the rise in rates that we’ve had over the last 18 months, juxtaposed against the idea that we have really strong secular trends that are developing in technology around things like artificial intelligence (AI). And it’ll be really that balance between how strong are those secular trends to outweigh the potential headwinds from the macro?

Where do you expect the most compelling opportunities within technology in 2024?

I think in a number of areas. We just mentioned AI. We often say this in technology that we overestimate what’s going to happen in a year and underestimate what’s going to happen in a decade. And who knows what’s going to happen over the next year, but I think that trend is firmly intact, and getting that right over the next three to five years is going to be very important for technology investing. I think it’s both secular growth and cyclical growth.

Semiconductors and semiconductor capital equipment continue to be very attractive industries. They are incredibly important to global economic growth, but they do have sensitivity to global economic growth. But the great thing about semiconductors is its rationalized industry structure. And every cycle’s had a higher peak and a higher trough. And margins have had higher troughs and higher peaks, and we feel like that will persist over a multiyear basis.

What is the single most underappreciated risk for tech?

I think the most underappreciated risks are twofold. One is, I guess, it’s appreciated. Everyone’s expecting a softer macro environment as we head into 2024. But I think the real risk is that companies rationalized cost structures over the last year and a half or so, and the risk that they actually go into an investment cycle at a time when the macro’s slowing, and you have potential pressures on the top line. And that’s generally not a favorable outcome.

What should investors consider in the technology sector over the next two years?

The way I think about having technology exposure over the multiyear is very similar to what we’ve seen over the last 15 years. And that is, technology in aggregate has grown faster than global GDP by some multiple. And as a result, the sector has seen higher absolute growth rates, and the margins and the returns for those companies that have strong competitive positions are higher than the general market as well.

Technology is one of the places you can actually find better growth, better margins over a multiyear period. And depending on where you start with valuations, it is a very attractive setup over a multiyear basis.