Page 28 - DIY Investor Magazine | Issue 29

INSIGHTS FROM SILICON VALLEY: OPTIMISM VERSUS PESSIMISM
Walter Price
Lead Manager Allianz Technology
OPTIMISM VERSUS PESSIMISM
There is a tug of war in financial markets today: there is real concern that the stimulus programme will generate inflation and therefore higher interest rates.
The recovery has been notably stronger than many expected, particularly in the US. The market is worried that it is running too hot and, perhaps, this is the top of the cycle with market valuations suggesting high expectations for growth.
This is set against the ongoing backdrop of a virus that continues to evade attempts to suppress it. It is still surging
in India and across parts of Europe. Investors are rightly wondering whether another surge in the virus could create real disruption, forcing further lockdowns and economic pain.
‘THE PUSH AND PULL BETWEEN THESE FORCES EXPLAINS THE SHRUG THAT HAS GREETED RESULTS FROM THE MAJOR TECHNOLOGY COMPANIES’
The push and pull between these forces explains the shrug that has greeted results from the major technology companies. Many of the technology giants recorded excellent first quarter results: Alphabet, Facebook and Amazon in particular.
Apple showed some caution about the next quarter because of the semiconductor shortage, while Microsoft was largely in line with expectations.
In spite of encouraging results, share prices have been lacklustre. We recognise that there are concerns on rate rises and, increasingly, corporate tax changes as well.
We moved our portfolio to give it more of a ‘value’ flavour around six months ago.
That said, more recently we’ve been looking to reinvest selectively in some of the higher growth companies because their valuations look more appealing given their strong results and slipping share prices.
ADVERTISING AND ECOMMERCE
Many of the larger technology companies have good operational leverage and should benefit significantly from the recovery – they have relatively high fixed costs, so show a huge increase in earnings when revenues recover.
In particular, we expect to see a rebound in advertising, as companies gear up for the year ahead, hoping to attract a share of the stimulus cheques.
There is a significant shift in the balance of advertising from TV to ecommerce, which directly benefits technology giants such as Facebook and Alphabet.
‘THE RISE IN ECOMMERCE WASN’T SIMPLY A COVID PHENOMENON, BUT IT LOOKS LIKE HABITS HAVE PERMANENTLY CHANGED’
It is well-established that the pandemic prompted a move to online shopping. Companies are now saying that the rise in ecommerce wasn’t simply a COVID phenomenon, but it looks like habits have permanently changed.
We believe ecommerce will continue to see good growth throughout 2021 and 2022, even as people go back to stores.
In 2020, around 40% of advertising money was spent on TV with the remainder spent on digital advertising.
DIY Investor Magazine | Jun 2021 28