Futu Strategy Meeting | Is investment in the technology sector starting again?

Influenced by the Fed's interest rate hike, global markets have fluctuated, and the US stock technology sector continues to be under pressure. Recently, Futu had the pleasure of inviting leading asset management BlackRock's global industry equity strategist, Bei Yuchen, to discuss issues such as “what impact will this round of the Fed's interest rate hike have on the technology industry” and “what is the future development direction of the technology sector”. Let's take a look at what he said.

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1. This year, technology stocks are under pressure due to the Federal Reserve's interest rate hike. At present, the lower limit of the Federal Reserve's benchmark interest rate has reached 3.75%, and many investors are discussing the end of the current round of interest rate hikes by the Federal Reserve. Next week is the day when the Federal Reserve is debating interest rates again. Let's also ask Mr. Bei, how much room does BlackRock think the Fed can reach in this round of interest rate hikes?

How high is the upper limit of interest rate hikes depends very much on how the inflation data will look for some time to come. The current inflation is caused by both demand and supply. Continued interest rate hikes cannot directly boost the supply side, which was relatively shrinking before, but it will only take time to curb inflation by suppressing the demand side. The investment team believes that market fluctuations may remain at a high level for some time to come, and may gradually decline after inflation.

Ultimately, the demand side needs to contract, and inflation clearly enters a downward cycle before we can see the interest rate hike cycle come to an end. The US inflation data for November began to decline, and the minutes of the Federal Reserve's November meeting confirm that interest rate hikes will slow down soon.

2. You just mentioned that the Fed's interest rate hike may slow down. What impact will this have on the technology sector?

Since the beginning of the year, the technology sector has been constrained by interest rate hikes and has not performed well because the interest rate hike environment is unfavorable to the performance of overvalued growth stocks. Beginning last year, small and medium-sized technology companies that are not profitable and have negative cash flow have performed poorly, while large and medium-sized technology companies with low growth rates have performed relatively well. In a volatile market environment, investors prefer large companies with stable profits and cash flows and low previous valuations. If the Fed's interest rate hike slows down, technology stocks are expected to be boosted, and small and medium-sized technology companies are also expected to stabilize.

3. Thank you, Mr. Bei, for answering the macro-level impact on the technology sector. Next, we'd like to ask you how to look at the fundamentals of the technology sector. We have recently seen a lot of news about technology companies' layoffs and other spending cuts. Many of our fans are also concerned about this. Would you like to analyze the fundamentals of technology companies with us?

The weakening fundamentals of the technology sector itself is in line with the market's expectations of a weakening economy. The interest rate hike was aimed at suppressing demand and driving inflation downward. The decline on the demand side includes a decline in demand in the technology sector.

Earnings trends and fundamentals still diverge among various sub-sectors. The sector benefiting from the pandemic is a sub-sector with poor fundamentals. Demand for hardware companies such as mobile phones and tablets may decline in the future due to the pandemic, which has brought consumer demand ahead of schedule. Due to the decline in consumer demand, electronic components, software components, semiconductor chips for personal electronic products, etc. are also affected. In addition to this, internet finance and e-commerce are also expected to weaken somewhat. There is an overall weakening trend in chips. Due to the decline in demand for personal consumer terminals and the gradual recovery in supply over the past two years, the market is worried that supply will exceed demand. However, the fundamentals of high-end chip foundries are still relatively stable. In contrast, the fundamentals of the electric vehicle and electric vehicle industry chains are relatively strong, and sales have maintained a good momentum. Also, new energy-related industries, such as solar energy, have been introduced one of the best performing sub-sectors in the technology sector since favorable policies have been introduced one after another to support local research and development in the US. The enterprise basic software and cybersecurity-related software sectors are also relatively stable.

However, judging from the valuation point of view, after a sharp correction, the valuations of many technology sub-sectors are quite attractive. At the same time, stock markets have historically bottomed out sooner than fundamentals have bottomed out. We believe that the most central factor affecting the technology sector is currently the trend of inflation.

4. Let's take another look at the policy side. At the beginning of November, the US government is also planning to push for new anti-monopoly legislation, the “American Innovation and Choice Online Act” and the “Open App Market Act” after the midterm elections, to prevent tech giants from using their platforms to block competitors. Will this have a big negative impact on tech companies?

The outcome of the US midterm elections was that the Democratic Party controlled the Senate and the Republican Party controlled the House of Representatives, forming a divided Congress. Considering the level of resistance and influence of actual implementation, regulation has limited impact on the US technology industry as a whole, so it will not be the main factor to consider in investment decisions.

Referring to historical experience, anti-monopoly generally doesn't have much influence on the growth and growth of technology enterprises. The key is that they need to have core competitiveness.

5. We are now also seeing that many countries are putting emphasis on achieving independence and autonomy in science and technology. What implications will this bring to investment in the technology sector?

When investing in the technology sector, we need to start considering how dependent companies are on the global industrial chain, including parts supply, revenue, and profit sources. If the enterprise supply chain is highly localized, the stability will be relatively strong.

We see that it will be a future trend for major economies to focus on the autonomy and control of the industrial chain, and domestic replacement companies in the industrial chain will benefit from this. In addition, some capital goods companies will also benefit from increased local investment in various countries.

6. Speaking of the independence and autonomy of technology, what is BlackRock's view of Chinese technology companies?

China is leading the world in consumer technology, and the semiconductor and software industries are also rapidly rising, which is expected to bring attractive returns to investors. The current penetration rate of local products in China is very low, and there is huge local demand and room for growth.

The Chinese government strongly supports policies in the field of basic science and technology, and is investing heavily to stimulate domestic innovation in key fields of basic science and technology, such as semiconductors and software.

Why should we invest in China's science and technology circuit now?

First, we believe that China's macro-environment, inflationary pressure is mild and manageable, interest rates are declining, monetary policy is relaxed, and the economy will gradually recover under a series of steady growth measures, providing good macro conditions for the science and technology circuit.

Looking at the recent past, the trend of regulatory policies is easing, and some regulations, such as the registration of new users of Internet platforms and game approval, have been marginally relaxed, which is expected to drive the recent market.

·Because the Sino-US relationship competes in the field of technology, it has brought structural opportunities for Chinese companies to localize hardware, semiconductors or software. However, the development of the new energy industry brought about by the global demand for carbon neutrality is also structural.

After experiencing a series of adjustments in the Chinese stock market, technology stocks are currently undervalued, providing support from a valuation perspective.

·Looking at the long term, China's economy is undergoing a process of transformation and upgrading to a service industry. Among these, there are many long-term benefits and opportunities worth deepening.

7. Thank you, Mr. Bei, for sharing with us your views on the macro, fundamentals, valuation, and policy aspects of the technology sector. Next, let's ask Mr. Bei for his views on the technology segment. First, I'd like to ask Mr. Bei for his views on semiconductors. On the one hand, hardware is currently undergoing a difficult inventory removal phase, but on the other hand, the US has completed legislation for the Chip and Science Act 2022. The bill covers an overall amount of about 280 billion US dollars and encourages companies to develop and manufacture chips in the US. How does BlackRock view semiconductor investment opportunities?

In the short term, the introduction of this law will have a certain negative impact on the profits of related industries in the US; however, in the medium term, the industry's investment in semiconductors in the US will increase as a result, thereby boosting the profits of related companies; in the long run, I believe the bill will help enhance the competitiveness of the domestic semiconductor industry in the US.

Although the semiconductor sector is cyclical, as a basic technology that all countries attach great importance to, it is essential to the independence of each country's science and technology, so we think semiconductors are still worth strategically aligning.

8. BlackRock believes that semiconductors still have some investment opportunities. Which medium- to long-term technology sector growth topics do you think are worth paying attention to?

Before the pandemic, we paid more attention to cloud construction; during the pandemic, we paid more attention to digital transformation, online healthcare, artificial intelligence, and the semiconductor industry where supply chains are relatively scarce. Currently, we still value cloud construction. Since enterprises have begun a new work model (integration of home and corporate office), this new model is actually based on the cloud, and it is expected that enterprise demand for cloud technology will remain strong in the future.

Also, as more and more data is stored in the cloud, people's requirements for data security are getting higher and higher, and it is foreseeable that data security will also be a long-term topic.

In the longer term, we are optimistic about the two emerging themes of the metaverse and the Internet Web 3.0. These are trends in the general direction of the technology sector.

In terms of hardware, we are optimistic about companies under the theme of supply chain stability. Currently, countries are paying more and more attention to basic technology and core autonomy in manufacturing, hoping to expand local supply chains. Under such circumstances, the corresponding equipment and equipment companies may benefit from investment in the localization of the industrial chain.

High-end equipment, space, and quantum computing are also good investment topics in the long run.

Finally, advanced technology related to carbon neutrality and energy transformation is also a future trend

9. In response to the current environment, what are the adjustments in the investment team's strategy?

In a macro environment of high inflation and interest rate hikes by the Bank of America, high-growth and high-valuation companies have higher long-term requirements for future cash flow. Generally speaking, we are more cautious about long-term companies, because we currently judge that inflation will still be high for some time to come, and it is still far from the central bank's 2% inflation target. It is expected that the central bank will not make a clear policy shift in the short term, and the market will still be quite volatile.

Specifically, since the beginning of the year, we have been more optimistic about undervalued valuable technology stocks. Large enterprises with high stability and undervaluation will also pay active attention. Among high-growth technology companies, we have done a further screening: we are particularly cautious about companies with negative cash flow and high periods of time, and prefer high-growth companies whose cash flow is currently positive or will turn positive in the future.

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