Technology stocks led a resurgence in equity markets last year after a tough period for rate-sensitive companies, but can it outperform again in 2024?
Funds in the IA Technology/Technology Innovation sector beat all other groups by a country mile in 2023, soaring 38.9% thanks to widespread excitement around the potential applications of artificial intelligence. Software such as ChatGPT put AI into the limelight, but some investors may be concerned about whether there are any new developments to feed this ongoing interest in tech.
These industry commentators that Portfolio Adviser spoke to unanimously agreed that there is a lot to be excited about in 2024, and not just in AI. There is much innovation happening across other parts of the industry that could make tech a sector to watch in the year ahead.
The AI revolution is still in its infancy
The AI frenzy that jumpstarted equity markets last year drove up the share price of some tech leaders substantially. One of the main beneficiaries of the rally – semiconductor maker Nvidia – was up 238.9% in those 12 months.
With such rapid growth in share price, some may wonder whether there is much upside to be had in the stock. However, James Yardley, senior research analyst at Chelsea Financial Services, said Nvidia is still “relatively cheap despite its stellar performance”.
Many investors have overlooked the fact that Nvidia’s earnings growth has surpassed its share price, so the stock could well rise even further this year if momentum remains strong, Yardley added. The likelihood of that happening this year is high if AI stays in vogue.
Yardley expects the theme to be front and centre again this year, with the launch of ChatGPT Five adding fuel to an already-popular theme.
“With the next iteration promising a similar or even greater impact than the last, investor excitement is palpable, making it very hard to ignore AI stocks at the moment,” he added.
“Analysts remain sceptical about Nvidia’s ability to maintain its sales and growth momentum, but if it does, a further re-rating is likely. Ultimately, with ChatGPT 5 looming, AI’s domination of the tech narrative is unlikely to wane anytime soon.”
Nevertheless, ongoing confidence in the investment theme does not guarantee a smooth ride, warned TAM Asset Management CIO James Penny. Like with any transformational technology, there will be bumps along the way, he said.
Most of this potential turbulence is likely to be caused by investor hype rather than company fundamentals – the continued growth of these AI leaders appears strong if investors can keep a level head.
AI will be a less concentrated market
The rally in tech companies last year may have felt widespread, but most of the AI boom was concentrated in a handful of names. The magnificent seven – made up of Apple, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia and Tesla – accounted for most of the S&P 500’s 18.6% return in 2023.
This year, Penny expects the AI theme to spread across a wider pool of tech companies. The largest leaders in the field were boosted by the first wave of AI investment, but many new players are likely to join the race this year.
“We see 2024 as having the potential for the AI trade to move away from those early innovators and instead focus on those companies presenting real evidence of adopting the innovation into their business models and revenue streams,” Penny said.
“In that respect, the AI revolution as an investable theme is still in its infancy. So those who didn’t pile into 2023’s hot new trend, fear not – you are not alone and there are plenty more opportunities to come.”
This broadening of opportunities will not only be found amongst tech companies – other sectors look set to benefit from utilising AI too.
Governments need to ramp up tech spending
One such area set to benefit is cybersecurity. Investors may be excited about the positive applications of AI, but it has also led to more advanced phishing attacks.
Not only will companies need to upgrade their information security to combat this rising threat, but governments too, according to Thomas Makey, investment director at Gresham House. Growing geo-political instability across the globe is also likely to put defence spending as a top priority for governments, making cybersecurity an interesting place to be invested.
Another area in great need of technology spending is healthcare. Makey highlighted the underinvestment in this sector, which has led to a stretched resources and long waiting lists. If the government intends to ease the strain on healthcare, it will need to invest in the adequate technology.
“Given the position of UK government finances, the state of public sector healthcare provision is unlikely to improve materially without significant changes in efficiency, regardless of who is in power,” Makey added.
“Reducing the administrative burden on clinicians to free up more time to spend with patients will be critical if the system is to remain fit for purpose.”
Globally, one of the most attractive areas to allocate to in healthcare now is biotechnology, according to Charlotte Cuthbertson, co-manager of MIGO Opportunities Trust.
Companies in the sector became “salvation stocks” during the pandemic when vaccinations were in high demand, but receding Covid cases in the ensuing years have led to “one hell of a hangover”. Share prices in the once-popular asset class have plummeted to a 20-year low, leaving valuations out of sync with fundamentals.
Biotech companies were also especially vulnerable to monetary tightening, but potential cuts to interest rates on the horizon could send their valuations flying back to their usual highs.
“It is a classic case of arbitrage between perception and reality,” Cuthbertson explained. “The strong fundamentals of the biotech companies are being overlooked by fearful investors. These are the times where we find the greatest opportunities.”
Marek Poszepczynski, manager of the International Biotechnology Trust, shares this optimistic view. His biotech-dedicated trust has had three consecutive years of negative returns, during which time the £252m portfolio has fallen 12.8% – lower interest rates could be what is needed to turn its fortunes around.
“Although it may be too early to declare a decisive victory in the battle against inflation, financial markets are beginning to conclude that we are reaching a peak in the current interest rate cycle,” Poszepczynski said.