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The pandemic and subsequent social distancing measures have hindered economic activity within both the service and manufacturing sectors in most US states. The macro environment has deteriorated amid record US jobless claims2, and a severe recession globally could be imminent in the near-term3.
Segments of the US economy vulnerable to social distancing4
Despite a recessionary macro picture and more volatility likely in the short-term, the tech sector is emerging as a likely structural winner1 from some of the trends set in motion by the pandemic, including working from home, cloud computing, gaming and ecommerce. These trends are being driven by the way enterprises are trying to cope with the lockdown measures while continuing to run their businesses.
Valuations for the overall US market and the US tech sector1 are now at relatively attractive levels as recent panic sell-offs over the respiratory disease and the oil-price collapse have offered better value for long-term focused investors, depending on their investment objectives and risk appetite.
A growth-oriented, flexible approach1 to the US tech sector underpinned by bottom-up stock selection could help optimise opportunities within the sector.
Wider adoption of technology
The pandemic is forcing workers and businesses to change the way they operate, and to some extent the continued containment measures are increasing the adoption of technology for work and life at home.
In particular, companies have three main priorities in the current environment:
As a result, different tech companies are likely to see an increase in the adoption rates for existing solutions provided, accelerating their growth rates. This will also increase the need for new solutions. For example, collaboration software vendors are benefitting from work from home, but at the same time, security concerns emerged as there are more endpoints outside of the corporate network.
A number of the transformational technologies we seek are in early stages of adoption5
Positioning for US tech1
We seek to invest in companies that are aligned with the mega trends in technology regardless of sector or market capitalisation. Our portfolio1 taps into secular mega trends such as digital transformation (cloud/software-as-a-service (SaaS)), artificial intelligence, autonomous machines, over-the-top streaming, advanced communications (5G), digital payments, direct-to-consumer commerce and advanced advertising.
We have high conviction in the portfolio holdings, particularly large growers because they dominate and define a new market, and sustainable growers for duration longer than expectations because they tend to have a larger competitive lead. Many fit into the secular mega trends.
In terms of portfolio positioning1, we added to software companies with exposure to both work-from-home and cybersecurity, and reduced our exposure in software companies that sell primarily to small and medium-sized businesses that could suffer more from the pandemic’s economic fallout. Additionally, we continue to favour semiconductor companies with data center and cloud computing exposure.
A positive demand environment for software6
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The US tech sector is emerging as a likely structural winner from some of the trends set in motion by the pandemic. After the recent market sell-offs, valuations are now at relatively attractive levels for long-term focused investors. An active approach to the market and US tech could help optimise opportunities within the sector.