'Still investment opportunities from tech stocks'

Bo Fifer, manager of Tcw explains what the untapped potential of the technology sector still is, despite the fact that artificial intelligence is playing the leading role, especially in the field of healthcare, while in terms of geography, Asia will be the one to benefit the most from this ongoing transformation.

The macroeconomic environment remains relatively solid, despite tighter inflation data. The Fed may be forced to keep rates "higher for longer", increasing recession fears. However, growth is still solid, with the Ism manufacturing index returning to expansionary territory in March for the first time since September 2022. Labour market data surprised on the upside. Most indices are down from their early pandemic peak, but remain above historical levels. Demand for AI-related infrastructure continues to outstrip supply and does not seem to be slowing down. As a result, growth estimates for many AI, tech and growth stocks continue to rise, a strong boost for the Nasdaq.

During the dot-com bubble, supply far exceeded demand. We are not witnessing this phenomenon in the infrastructure for Ia. Cloud service providers are still trying to meet existing demand, even before Ia has started to influence most sectors. Since the beginning of 2023, Nvidia's shares have risen 553 per cent, but unlike the dot-com bubble, this movement has been fuelled by actual business demand. Despite the strong price increase, the forward P/e multiple has almost halved since mid-2023, with even stronger earnings growth. In our view, we are in the early stages of a ten-year trend. This does not mean that there will be no corrections, but we do not fear a bubble at the moment.

Rising rates tend to have a more negative effect on growth stocks than high but stable rates. In 2022, when it became clear that rates would reach levels not seen in over a decade, tech stocks, and Ia stocks in particular, fell sharply. There is still debate about how long rates will remain high, but there is a broad consensus that we have passed the peak. In the short term, demand for EI is outweighing any macroeconomic pressure and, in fact, one of the promises of EI is to make the companies that employ it more productive and efficient. Should the global economy decline, EI could allow margins to be kept at reasonable levels.

EI, and in particular generative EI, are the most important drivers of technology demand today. The electrification of cars also represents a huge opportunity. The shift to the cloud remains a key driver for many companies in software and infrastructure, while consumer electronics and PCs are less important end markets than in the past. We have seen a reduction in the amplitude of semiconductor (and technology) cycles, which is positive for equity valuations.