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Henderson Global Technology Outlook 2016: more of the same?

Stuart O'Gorman Director of Technology Equities for Henderson gives his outlook for this year.

How did technology stocks fare in 2015?

Technology outperformed again in 2015, despite the dual headwinds of a weak global economic environment and the strength of the US dollar both impacting demand for technology products.

Within this period, however, there was a large divergence in performance – areas heavily exposed to either secular growth (of the economy in general) or the US economy did well in spite of high valuations, while more cyclical (sensitive to changes in the business cycle) and globally-exposed companies generally did very poorly. Even within strongly-performing areas such as the internet, returns were very concentrated in a few winners such as Google, Amazon, Facebook and Netflix, while many tier two or medium-sized companies in the same sector struggled.

What can we expect in 2016?

Entering 2016, the story remains similar – the secular strengths of the winners are as strong as ever, but valuations appear increasingly stretched. Cyclical areas of technology, such as semiconductors and PC-related hardware, while very cheap, are still struggling with both macroeconomic factors and potential obsolescence. On the macroeconomic front, the US Federal Reserve has raised interest rates from near-zero for the first time in seven years, while US GDP growth remains stuck in the 2.0-2.5% range. While interest rates are likely to move modestly higher, we think it is unlikely that there will be a major change in the macroeconomic backdrop for stocks. The strength of the US dollar in 2015 has anticipated much of the predicted move in interest rates, but we remain cognisant of the risk of further dollar strength for the tech sector. Given this low growth, low rate environment, we will continue to run a balanced portfolio with a moderate bias towards growth stocks.

Areas of focus

1. Cloud infrastructure

In 2015, we saw acceleration in the trend towards cloud infrastructure (hardware and software to facilitate the storage and access of data and programmes over the internet), which hurt a number of legacy hardware providers. We believe that this trend will continue in 2015 with the winners in cloud infrastructure being Amazon, Microsoft, and potentially Google. The amount of dollar spending on cloud infrastructure still remains a small part of corporate IT spending, but we believe it will continue to grow by more than 50% in 2016 − this is highly disruptive to the margin structure of many storage and infrastructure companies. As well as the large company winners in the space, we are also focused on other commodity, services and distribution providers that stand to benefit from this trend. Generally, our view is that companies related to the cloud infrastructure space are more attractively valued than those in the cloud software space.

2. The internet

We also continue to favour the internet − technological and demographic trends are driving market share gains from ‘old economy’ media, advertising and retail companies. More importantly, valuations within the internet sector continue to remain attractive versus other secular growth areas within technology. While we continue to believe that the internet is ‘a-winner-takes-most’ market (ie. leaders such as Facebook, Amazon, Google and Netflix will continue to take a disproportionate amount of market share), we are also focusing on select opportunities in emerging market and US medium-sized internet companies that have continued to build their competitive positioning.

3. Paperless payments

Given that around 85% of global payment transactions (by volume) are still in cash and cheques, we have confidence that the secular growth of electronic payments in emerging economies and the increasing use of credit/debit cards in developed countries is a long-term theme with strong ongoing potential. Cash as a percentage of transactions in the economy continues to shrink, while mobile payments have been rising at a compound annualised growth rate of more than 50% since 2010. Electronic payments in all formats are increasing, whether it be swipe technology, chip and pin, or more modern NFC-based (near field communications) touch and go technology – either via a bank card or a mobile device with pre-loaded bank card credentials. Mobile phone-based financial services are allowing people to bank without a formal bank account. We continue to invest in companies that should benefit most from the network effects underlying this strong trend, such as MasterCard and Visa.

Overall, we continue to favour companies with high barriers to entry and strong cash flows. We are also closely re-examining companies where investors have mistaken cyclical weakness for secular decline. These companies, while they are prone to gyrations in the global economy, do have technological advantages which create barriers to entry and sustainable cash flows and a rational competitive environment. We believe that such companies will be re-rated when the global economy improves.


Overall, 2016 is likely to be a year of transition for the global economy. As long-term technology investors we will continue to focus on bottom-up stock fundamentals, and areas of the technology sector which we believe will continue to take share both within IT spending, and within the economy as a whole.

Stock examples mentioned are intended for illustrative purposes only and are not indicative of the historical or future performance of the strategy or the chances of success of any particular strategy. References made to individual securities should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

Stuart O'Gorman, Director of Technology Equities for Henderson Global Investors, January 2016

Please note that these are the views of Stuart O'Gorman for Henderson Global Investors and should not be interpreted as the views of RL360°.


Stuart O'Gorman

Director of Technology Equities Henderson Global Investors
January 7 2016

Please note that these are the views of Stuart O'Gorman, Director of Technology Equities for Henderson and should not be interpreted as the views of RL360°.

360° fund links

A range of Henderson funds can be accessed through our guided architecture products Oracle, Paragon, Quantum and LifePlan. They can also be accessed through our PIMS portfolio bond.