Perspectives of the technology sector in 2024

The technology sector experienced a bustling 2023. In this way, it lays the foundation for what experts anticipate as another year of solid performance this year. According to asset management industry professionals, in 2024 the technology sector will be characterized by strong performance.

Investing in technology in 2024

Mark Denham, head of European equities at Carmignac

At Carmignac we are heavily exposed to the technology sector. We believe it presents solid medium-term prospects, in line with our five-year investment horizon.

For example, ASML, the world leader in lithography, a crucial stage in the manufacture of semiconductors. This company recorded very significant orders for its equipment in the fourth quarter, worth about 9,000 million euros. This is due to the demand for more powerful and complex silicon chips, whose manufacture requires the most advanced lithographic equipment, as well as the explosive demand for chips that allow processing artificial intelligence (AI) applications.

We also like software companies in Europe, such as SAP, Dassault Systèmes and Temenos. They manufacture software products that improve productivity for their respective clients, where we see a strong steady growth in demand. In addition, all of them have made great strides on the path to subscription software, which gives them great visibility of future revenues.

The technology sector in Europe has had a very strong start to the year. The reason? The results, especially ASML +20% and SAP +17%, more than for a common theme.

The expectation around the opportunity of artificial intelligence has led many companies to very high levels, especially in the U.S. In Europe, we only expect an indirect benefit from AI for technology. An example is ASML, where more sophisticated manufacturing equipment is needed to manufacture the new AI chips. Many software companies will also incorporate AI into their products, such as SAP, for example.

David Rainville, global technology manager at Sycomore AM

The fundamentals of demand in the technology sector remain relatively resilient despite the significant change in the interest rate environment. This strength surprised most investors. Combined with better entry points in 2022, it drove a strong rebound in the first half of 2023. Another catalyst for this rebound was the massive popularization of ChatGPT: it unlocked significant corporate investments towards the generative artificial intelligence sector. We believe that the next wave of investments in AI could be the most impactful megatrend for the technology sector.

To expect a future driven by AI, we believe that the world's digital infrastructure and cybersecurity needs will require significant modernization to handle and process the amount of data and computing power that this megatrend will create. The magnitude of the necessary investments is unprecedented. This has impacted the revenue expectations of companies like Nvidia by more than 45,000 million dollars for the next year (from about 36,000 million to now around 81,000 million).

In 2024 we expect that "deep technology", modern digital infrastructure, and cybersecurity companies will greatly benefit from this modernization. We not only believe that this has already begun in 2023, but we see it as a multi-year investment wave of over a trillion dollars, from which smart technology investors can make money. Aside from those specific investments in AI, technology spending trends are beginning to turn after 18 difficult months of normalization and rationalization of IT budgets, after the strong movement of IT spending during the Covid pandemic. This has been highlighted in recent months with the decline in server shipments, the recovery of PC spending, the improvement in memory chip prices, and the stabilization of software reserves.

As long-term sustainable investors, we favor companies that will benefit from medium and long-term megatrends; which, at the same time offer technological solutions with a positive impact on our world, whether from an environmental or social point of view. For example, Medtech and Edtech are topics that will have a positive impact on our society by improving outcomes in education and health. More generally, we believe that companies that incorporate sustainable technology into their business models will likely also benefit even more from these trends. We look for companies that seek to reduce negative externalities. They can generate unforeseen costs and risks that can significantly affect future equity profitability.

In conclusion, we are constructive about tech equity for 2024. With still undemanding valuations and improving fundamentals, complemented by the start of a major wave of digital infrastructure modernization. Even if the macroeconomic environment can generate some volatility, we believe that having a range of attractive long-term investment themes that entail lower fundamental and sustainability risks will over time be a winning option for technology investors.