Can we be optimistic about tech stocks in 2023?
Outlook 2023 for the technology sector. Comment from Jonathan Curtis, Portfolio Manager at Franklin Equity Group
Franklin Equity Group believes digital transformation is still in its infancy, with favorable elements of long-term secular growth that we believe extend well beyond the current economic cycle. In 2022 , the increase in interest rates , the slowdown in economic activity and the normalization of consumption habits of the COVID-19 era have put pressure on the technology sector. While the past year has been challenging , we remain optimistic as we continue to see signs of lasting quality, sustainable growth and favorable valuations.
Looking ahead to 2023, we expect companies to continue to move forward with many of their digital transformation initiatives, albeit at a slower pace, even as rate hikes moderate and economic activity slows. This is because these investments are driving much-needed productivity gains, especially in an inflationary environment.
We have identified opportunities in high-quality platform-like companies, which are essential to their customers' operations, in enterprise software and information services (IT) companies, and in the secure cloud and Software-as-a-Service (SaaS) subtopics, artificial intelligence (AI)/machine learning, the future of work and cybersecurity.
Conversely, we expect increased uncertainty in the consumer technology sector as COVID-19 tailwinds continue to moderate, energy prices rise in Europe and global economic activity slows. In our view, sectors such as consumer IT hardware, gaming, e-commerce and digital advertising may have a slightly longer road to recovery. We also expect consumer discretionary spending to weaken as unemployment rises and household savings accumulated during the pandemic decline, amid persistently high inflation. Indeed, this situation started to play out in the second half of 2022, leading to negative revisions to estimates in the semiconductor, consumer personal computer (PC), gaming and internet sectors. While we believe below-trend growth is likely to continue into 2023, we think we are getting closer to the point where valuations will incorporate this view. In these consumer-facing categories, we remain focused on companies that have reached significant scale and that are related to subtopics such as digital media transformation, new commerce, electrification and autonomy.
According to our analysis, our strategy is well positioned for a recovery once rates stabilize and investors return to more enterprise-focused tech names.
These are high-quality companies that demonstrate superior long-term growth potential, lower-risk valuations and better valuations. In our view, for investors who share our long-term mindset, the risk/reward profile of the technology sector is probably the best in years. If rates stabilize in the coming months, we believe the technology sector can offer an attractive mix of “attack” and “defense” in this environment, thanks to higher levels of sustained secular growth and strong balance sheets and margins. Ultimately, we believe digital transformation is still in its infancy, with favorable elements of long-term secular growth that we believe extend well beyond the current economic cycle.
Over the past 20 years, companies in the digital economy have consistently outpaced overall gross domestic product (GDP) growth in the United States, thanks to steady venture capital (VC) investments in all cycles. However, these companies still account for only about 10% of total GDP. In our analysis, this trend will continue to increase across geographies for the foreseeable future, and we will likely continue to own what we believe are high-quality companies that are best positioned to capture this growth.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/innovazione/2023-settore-tecnologico/ on Sun, 01 Jan 2023 06:37:05 +0000.