Is tech set for a reboot or just another short buzz in 2023?
With so many of us investing in technology stocks in one way or another – the big tech names appear in many of the most popular Investment Trusts, ETFs and funds, after all – you'd be forgiven for feeling a bit sore about how the technology sector performed in 2022. And you also wouldn’t be the only one wondering how, and if, it could stage a comeback in 2023.
As we finally settle into this new year, lots of questions remain about what lies ahead for tech, and the future is far from certain. There’s a global recession teetering on the horizon, along with a biting cost of living crisis, and some ghosts from the Covid-19 pandemic haven’t quite left us yet either. So let’s take a step back and reflect on how technology performed in 2022, which themes struggled the most, and where there were glimpses of light in a seemingly cut and dry ‘bad year’.
We’ll also discuss how 2023 could play out for the sector, including reasons to be cautious and reasons to be optimistic about investing in tech in 2023, and share some exclusive insight from Ben Rogoff, Lead Fund Manager at the Polar Capital Technology Trust, on which theme he’s “hugely excited” about and his thoughts on the obstacles that could lie ahead.
Reflecting on technology in 2022
The technology sector had a markedly downbeat year in 2022. The NASDAQ 100, a key stock market index primarily made up of tech companies, returned a dismal –32.4%, making 2022 its worst year since 2008 (when it fell 42% in light of the global financial crash).
Hit by continuous interest rate hikes by the Federal Reserve in the US and mass layoffs across the sector, technology stocks noticeably lagged behind the broader market, with some of the biggest names posting less-than-optimal company results and outlooks over the course of the year. But why exactly was 2022 such a disastrous period for tech?
Much of the tech industry had benefitted from a surge in interest during the Covid-19 pandemic as demand for services and products skyrocketed. When the world went into lockdown, it was the internet, social media and products like Skype and Microsoft Teams that kept us all connected. Who doesn’t remember a somewhat-forced family Zoom quiz during the early days of quarantine and WFH?
However, when we emerged from our household dens and life started to return to “normality”, the tailwinds (a finance term to describe factors that positively affect performance) that had boosted tech stocks in the pandemic dissipated. Add to that some steep interest rate hikes, ongoing supply chain shortages and rising inflation eating away at consumer spending, and the environment for technology became increasingly challenging throughout the course of 2022.
Even the biggest tech fish in the sea weren’t immune to these pressures. Indeed, mega-cap technology companies (firms with a market value of $200bn or more) noticeably struggled. The ‘MFAANG’ group - made up of Microsoft, Facebook (Meta), Amazon, Apple, Netflix and Google (Alphabet) - saw returns fall 43% in 2022, underperforming the wider market for the first time since 2016.
Though poor returns were recorded across every major subsector, the weakest performer of all was the internet, which saw its largest underperformance relative to the S&P 500 in the past 20 years – no doubt in part due to the mass return to the office and as our collective love affair with streaming services like Netflix and Disney+ started to wear off.
The semi-conductor sector, responsible for providing us with the chips that power all of our electronic devices, also battled a stifling supply chain shortage that saw returns from its main index, the PHLX Semiconductor Sector Index (SOX), slide a painful –34.9%. However, data from tech research and consultancy firm Gartner recently revealed that worldwide semiconductor revenue actually increased 1.1% in 2022 to total $601.7bn, up from $595bn in 2021.
So it wasn’t doom and gloom across the whole board. The automotive market remained relatively resilient too. For example, global new car registrations reached 66.2 million units in 2022 as sales recovered in the last quarter. Strong consumer demand in the US drove North American car production up by 10.3% in 2022, while the lifting of local lockdowns saw a similar 11.7% increase in China, and a huge 21.6% growth in India. In total, more than 68 million passenger cars were manufactured worldwide in 2022 – up 7.9% from 2021.
The outlook for tech in 2023
Despite the decidedly mixed mood music, the technology sector made up 26% of the S&P 500’s market cap (its total value) at the end of 2022, and still accounted for 21% of its profits. As we settle into a new year, many investors are feeling bullish – this is just another finance term for being hopeful or confident – about tech stocks in 2023.
AI fever and other reasons to be optimistic about tech in 2023
There are early signs that this optimism is well-placed. In spite of some of the less-than-stellar performances we’ve seen in the last year, a catastrophic sell-off like some of us might remember from the dot-com bubble (and its subsequent burst) seems unlikely as the biggest tech companies remain financially robust.
Take Apple, for example, which saw an eye-watering –24.53% drop in returns in 2022. That might make some alarm bells ring at first glance, but the company’s cash reserves at the end of Q4 stood at a decidedly healthy $23.6bn nevertheless. Similarly, Alphabet (the owner of Google) - whose shares were down an even more painful –35.61% in 2022 - still recorded $20.9bn in cash reserves at the end of Q4. So the threat of the big tech beasts going bust in the near future seems largely unthinkable.
Although the sector’s recent performance has caused a spate of lower valuations, this in itself can be viewed as an opportunity, as some investors like to buy stocks that are trading at comparatively low prices in order to make a profit when they regain lost ground – this method is often referred to as “buying the dip”. With the sharply lower valuations we’re seeing in tech at the moment – all things being equal – the sector’s medium-term return profile (basically the likelihood that prices will bounce back) should improve and give rise to ‘cheaper’ opportunities than we would ordinarily get.
Perhaps most compelling of all, there is still a great deal of innovation already taking place and on the horizon for the technology sector as a whole. The rise of Large Language Models and their functionality, such as ChatGPT in particular, has been dominating headlines in recent months and drawing investor interest thanks to their potential for widespread consumer use. It’s far from perfect, however, as we all rather spectacularly found out when Google’s AI ‘Bard’ made a factual error in its first ever public demonstration.
Nevertheless, momentum behind AI and appetite for investment in the sector remains sky-high. Ben Rogoff, Lead Fund Manager at the Polar Capital Technology Trust, told us why he’s “hugely excited” for the opportunities this subsector presents: “The temptation is to say that AI is going to change everything and I suspect that in time it will, in just the same way that in the late 90s people got hugely excited about the internet. We're wrong for about 10 years and then, of course, we're absolutely right and then some.”
Some of the top performing technology Investment Trusts are already hedging their bets on the success of AI. SuperSeed Capital, whose 1-year returns have been a runaway success at 25.71%, stated in its Q4 2022 update that it intends to continue to “lean into AI as the main tech driver for change”. Another top performer of last year, Sure Ventures, also attributed much of the positive impacts on its performance to AI in its Q3 portfolio update.
The macroeconomic shadow and reasons to be cautious about tech in 2023
The biggest obstacles to growth in the tech sector in 2023 are largely hangovers from last year, but one crucial factor which investors are hoping will change is the supply chain issues that the industry has been battling since the pandemic, driven in part by China’s strict zero-Covid policy and extensive use of lockdowns. This has been a significant contributor to the global chip shortage on a manufacturing level. But even beyond that, it had a knock-on effect on GDP forecasts which in turn played out in poorer company results and outlooks. China only lifted this policy in the New Year, so we’ll have to watch and see if this helps to rejuvenate the sector over the coming months. The consensus seems to be, however, that it won’t be an overnight fix.
Meanwhile, even if supply chain issues iron themselves out, there’s no escaping the overarching sentiment that purse strings are going to be tight this year. With weaker growth expectations and widespread caution, the words “global recession” have been floating around for months, and this in turn has impacted IT spending around the world – further compounded by concerns that many companies had overinvested during the pandemic in a scramble to upgrade and expand their digital capabilities to support at-home working. On a consumer level too, many have been abandoning their online subscription services as the cost of living crisis continues to bite. So with companies and individuals already experiencing the pinch, markets in general are feeling a bit vulnerable too – and the tech sector is by no means immune.
Commenting on the challenges ahead for tech in 2023, Rogoff said: “The overall caution is because the tech sector isn't in control of its own destiny right now and we're caught up in a macroeconomic conundrum. […] Certainly the immediate outlook over the next 12 months is that tech sector earnings and revenue growth is negligible, like the broader market. There’s not much earnings growth ahead because we’re in a near-recession environment.
However, he maintained that there are better days ahead: “At some point, if we get comfortable that the worst of inflation is behind us – which my gut feel says that it may already be – then tech equities and other risk assets become quite desirable. […] And on top of that we’ve just found out that there are killer applications for artificial intelligence and, in the end, this is the bit that excited me about technology from the very first day to the current time of managing a fund. There are very few sectors like ours that can throw up new technologies that have the potential to become general purpose technologies and change everything, and I think AI is one of those.”
Mike Seidenberg, Lead Portfolio Manager at the Allianz Technology Trust (another of the largest tech trusts on the market), echoed some of Rogoff’s thoughts about 2023 in his most recent portfolio commentary, stating: “While Covid appears to be increasingly in the rearview mirror, the use of technology accelerated as a result of the crisis and may have permanently changed how we live and work and has translated to a further embrace of technology usage. […] We are in a period of rapid change, where the importance of technology is key to the prosperity of most industries. We believe that this environment is likely to provide attractive growth opportunities in many technology stocks over the next several years.”
Summarising what’s on the horizon for tech
There is certainly no shortage of reasons why investors might want to heed caution about what lies ahead in 2023. There are good foundations for recovery, but widespread macro (finance jargon for 'large-scale') uncertainty still casts an ominous shadow overhead. The range of potential outcomes remains unusually wide, at least in the short-term – there’s still a large amount of debate over if, when and to what extent this long-dreaded global recession will strike.
But there are equally a number of pockets of immense potential – particularly in AI, as we’ve discussed – that have attracted vast amounts of attention and optimism for the months and years ahead. Nothing is guaranteed, of course – as is always the case when it comes to investing – but many are of the opinion that the Next Big Thing in tech is just getting started, and that low valuations offer an attractive starting point for investors to get their foot in the door while opportunities are still relatively cheap.
With all that in mind, however, it doesn’t seem as if the issues of 2022 will simply go away in 2023 – in fact, the consensus remains that this year could be similarly difficult, if not even more so, than its predecessor. But there is at last light at the end of the tunnel.
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