Janus Henderson Investors: Global tech - actively managing the coronavirus impact

Key takeaways:

• Technology supply chain disruption is likely to be limited and manageable given we are currently in the low season of technology demand
• The team’s portfolios have limited exposure to areas that have been impacted the most such as smartphones and automotive
• Some areas are benefiting, such as cloud infrastructure, which supports the demand to work from home, while longer term the trend towards process automation may be accelerated

As technology investors we focus on long-term secular growth trends but as active managers we also dynamically assess all risks to our portfolios, including the current coronavirus outbreak. That risk has been more focused on China until recently because rising concerns around a global pandemic have hit equity markets harder. Demand for ’safe-haven assets’ like US Treasuries have seen yields hitting new lows, which also indicates rising concerns for global growth and the potential for a recession triggered by this emerging economic shock.

China’s role in global technology

A point that we made previously about the US-China trade war concerns also applies here; China represents a relatively small percentage of global technology spending. For many large technology companies, notably in the internet and software sectors, China is a ‘de minimis’ part of their end demand while they have no supply chain there to speak of either.

However, for other sub-sectors such as semiconductors and hardware, China is both an important part of some technology companies’ end demand as well as supply chain. We have seen companies such as Apple prudently weaken their outlooks following the virus outbreak. Our daily engagement with various technology companies provides us with prompt updates on the situation in China and we think the progress has so far been encouraging. After the delayed return to work on the 10th of February following the Chinese New Year, many factories (excluding those in Wuhan) have reopened, labour is returning while raw material and finished good logistics have successfully restarted. It will take time for factories to reach optimal capacity and there is still the risk of a factory virus outbreak. But given we are currently in the low season of technology demand, we think the disruption to supply chains is likely to be limited and manageable.

Impact on global demand

On the demand side there are more question marks in terms of how quickly things will recover, as well as the Chinese government’s potential stimulus policies to support the economy. Major end markets like automotive and smartphones have been severely impacted while in e-commerce, the intersection with the physical world and the need for offline delivery has led to significant declines there too. We have not seen order cuts to the supply chain yet, but it would be prudent to assume that once companies have a firmer idea of demand, their supply chain capacity and channel inventory, they will likely adjust orders over the next couple of months.

Portfolio implications

We have not adjusted our portfolios based on any temporary demand shocks. Generally, we have limited exposure to the areas impacted the most as mentioned, given our focus on the longer-term mega trends of internet transformation, next generation infrastructure, payment digitisation and artificial intelligence (AI). In some areas the virus has had a positive impact on technology demand, such as online gaming due to the extended holidays in some countries and school closures, as well as work collaboration tools for people that have been forced to work from home and cancel business travel. In both cases more cloud infrastructure investment will be required. Longer term, we expect the coronavirus concerns will only accelerate the existing trend towards automating production given China’s shrinking working population and wage inflation.

Only time will tell

The situation outside of China remains much more fluid. A worst-case scenario of a global pandemic would undoubtedly have a significant economic impact and given the fragile nature of the global economy, could tip the world into recession. For now, that remains a low probability outcome and our on-the-ground reports from an assortment of technology companies in China give us confidence that with the right measures in place, the virus could potentially be contained. Historically, these sort of virus outbreaks have had a limited long-term impact on markets and companies. However, as custodians of clients’ capital we remain highly vigilant and will reassess our portfolio positioning when appropriate.

References to individual companies or any securities is purely for the purpose of information only and should not be construed as a recommendation to buy or sell the same.

Notes:

Internet transformation: the move to entertainment on demand in music, TV and gaming will accelerate the shift of advertising to online. Shopping, dating, education and travel will continue to migrate.

Next generation infrastructure: this theme is closely linked to the investment team’s focus on artificial intelligence as the next wave in computing. This includes cloud infrastructure (provision of servers, storage, a network, visualisation software) that is needed to manage IT services remotely by renting these facilities from specialised service providers over the internet.