- Rapid advances in generative AI technologies — characterised by ChatGPT’s viral success — has created winners in the tech sector such as chipmaker Nvidia Corp.
- If the Fed starts to cut rates, that could be positive for duration assets, in particular growth technology businesses, says Jonathan Curtis from Franklin Equity Group.
- He expects companies with strong monetisation models around generative AI to do well. Semiconductor names and cloud computing vendors are also among the potential beneficiaries.
- The technology sector is already in the middle of its own recession. That means the negative estimate revisions in recent quarters may soon come to an end.
- Hong Kong investors may gain exposure to the world’s most technologically innovative companies with the Endowus Global Technology model portfolio. If you prefer to build your own portfolio with single funds, explore the Fund Smart platform on Endowus HK.
What are the opportunities and risks in artificial intelligence and tech investing?
The artificial intelligence (AI) boom has created winners in the technology sector worldwide. More tech companies, big and small, are set to benefit from the latest developments in AI and digital transformation. This comes amid fervent interest and rapid advances in generative AI tools, such as ChatGPT, which can create human-like text and images — crafting everything from artwork and essays to meal plans and business proposals.
Nvidia Corp, for one, saw its shares triple in value in less than eight months in 2023, with its market valuation briefly crossing the US$1 trillion mark on 30 May 2023 as investors piled into the Silicon Valley-based chipmaker's stock. Nvidia’s specialised chips are needed to power a new generation of AI products as tech giants race to develop AI capabilities.
Jonathan Curtis, Senior Vice President, Director of Portfolio Management, and Portfolio Manager at Franklin Equity Group, discusses the opportunities and risks for investors interested in AI and Big Tech. He also shares his views on the uncertainty surrounding the interest rate path, as well as how investors may uncover the gems among small and mid-cap tech companies.
Watch the interview
- 00:00 – Introduction
- 00:08 – How does Franklin Templeton see the Fed moving on rates? How does this uncertainty with the rate path impact the way investors assess the future of growth stocks?
- 02:04 – There has been an indiscriminate selldown of tech stocks. Are there opportunities today for long-term tech investors? How should they sieve out the opportunities today?
- 05:00 – Within FAANG or Big Tech, what are some key risks and opportunities that investors should be looking out for?
- 06:41 – Do small and mid-cap tech companies have the capacity to pull ahead of their larger peers in terms of growth? If so, what are some specific factors — such as niche tech segmentation or cash position — that investors need to pay attention to in order to uncover the gems?
- 07:58 – How should investors consider opportunities and risks in AI investing?
- 10:53 – Franklin Templeton sees tremendous growth prospects ahead for the technology sector.
- 11:38 – We are likely closer to the end of the rate cycle than the beginning. This should be supportive of valuation multiples.
- 11:52 – The technology sector is already in the middle of its own recession, in this post-Covid digestion period.
Highlights from the discussion
Here are some key snippets from the conversation between Edwin Ho, Client Advisor Lead at Endowus HK, and Jonathan Curtis, Senior Vice President, Director of Portfolio Management, and Portfolio Manager at Franklin Equity Group.
Interest rates, uncertainty, and growth stocks
Edwin: The Fed has left the door open on whether it will hike interest rates again, given the backdrop of high inflation, slowing growth, and credit tightening. How does this uncertainty impact the way investors assess the future of growth stocks?
Jonathan: In our group, we believe we are closer to the end of the rate cycle than the beginning. If that is true, we believe we’re going to be operating at least in a stable rate environment. That should be positive in getting investors to come back into duration assets, in particular growth technology businesses.
However, if the Fed has to pivot and starts to cut rates, that could be very positive for duration assets.
Opportunities for long-term tech investors
Edwin: There has been an indiscriminate selldown of tech stocks. Are there opportunities today for long-term tech investors? How should they sieve out the opportunities today?
Jonathan: We think we are closer to the end of the rate cycle and we are through a lot of the negative estimate revisions, and that will be positive for a return to growth in the sector. You always want to think about owning quality businesses that have excellent long-term growth prospects and are trading at discounts to their intrinsic value.
On the quality front, we’re looking for high-quality business models, companies with some sustainable competitive advantage, strong management teams, and high efficiency. We also want to own well-capitalised businesses, companies that have strong balance sheets.
Uncovering the gems in small and mid-cap tech stocks
Edwin: Could small and mid-cap tech companies pull ahead of their larger peers in terms of growth? To identify the gems, what specific factors may investors pay attention to?
Jonathan: Certainly, we own many of the Big Tech names that have had a good run year to date. But we are underweight large-cap tech, and overweight small and mid-cap tech, primarily because we think the latter has better long-term growth prospects. And we believe we have a team and process that allows us to uncover some of the best opportunities.
We think, particularly in small and mid-cap tech, many of these businesses have the quality dynamic, excellent growth prospects, and are still trading at very attractive valuation levels.
Investing in artificial intelligence
Edwin: What do you think about generative AI technologies? What are the opportunities and risks in AI investing?
Jonathan: Artificial intelligence has been a mainstay of the tech sector for many years now, but oftentimes for back-end systems or work. With generative AI around language and content generation, we’re starting to see these technologies to the front end, right to the end-user. We think that’s very, very exciting.
These models are now being incorporated directly into the productivity tools that hundreds of millions of knowledge workers use every day. We think that’s going to unleash a lot of productivity, and the companies that are able to charge for that productivity, we think are going to do quite well. For example, names like Microsoft and Adobe, with strong monetisation models around generative AI are going to do well.
Furthermore, this is going to put increased demands on the semiconductor layer. That means companies like Nvidia, which sells the GPUs that are critical for this, or TSMC, which does the fabrication of these advanced chips, are expected to do well. In addition, the cloud computing vendors as well as many infrastructure or application software companies can also benefit from generative AI developments.
Key takeaways
Jonathan: Firstly, we see tremendous growth prospects ahead for the technology sector on the back of this multi-trillion-dollar opportunity we see for digital transformation. Two sub-themes — cloud computing and generative AI — are opportunities that are profoundly misunderstood by investors at this point.
We think cloud computing is soon going to stabilise and, as the economy improves, start to re-accelerate. As for generative AI, it’s a big opportunity that will only get bigger as these models are put into productivity tools.
Secondly, we are likely closer to the end of the rate cycle than the beginning. This should be supportive of valuation multiples. If interest rates were to come down, we will see multiples in the tech sector potentially go up. That would be positive.
Thirdly, the technology sector is already in the middle of its own recession, in this post-Covid digestion period. That is positive because the negative estimate revisions we’ve seen over the past quarters are soon coming to an end, and that will ultimately create stability.
Invest in AI and technology with a core-satellite approach
Keen to learn more about AI and tech investing? Watch the replay of our webinar with Jonathan Curtis and Matthew Cioppa from Franklin Templeton, and Endowus Chairman & Chief Investment Officer Samuel Rhee.
Hong Kong investors may gain exposure to the world’s most technologically innovative companies with the Endowus Global Technology model portfolio, which is part of our Satellite offerings. This multi-fund, globally diversified model portfolio comprises a curated selection of Best-In-Class tech funds across key themes such as AI, robotics, blockchain, and more. With Endowus HK, investors in Hong Kong can use this ready-made, pre-populated template as a starting point for their own portfolios. To read more about the model portfolio and how it has performed, click here.
The Endowus Global Technology model portfolio is designed to be suitable for a core-satellite investment approach. It is recommended to be used as a satellite allocation to complement your core allocation. After allocating the bulk or all of their asset allocation to core portfolios, some investors may then look at the satellite portfolios as an option to diversify further or focus on certain geographies, sectors, themes or factors you want additional exposure to.
Prefer to customise your ideal investment portfolio with single tech funds? Explore low-cost and Best-In-Class funds from global fund managers, available in HKD and USD, on the Endowus HK Fund Smart platform.
To get started with Endowus HK, click here.
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