The next big thing

TECHNOLOGY equities have been extremely rewarding in recent years but are now wobbling, thanks to interest rate and valuation fears. We ask Jon Guinness, Fidelity International portfolio manager, on his views of tech's most promising themes, sustainability implications and valuations. Guinness manages Fidelity's Sustainable Future Connectivity Fund.

What do you see as the major secular themes within technology?

There is an incredibly wide variety of secular themes within the broad TMT (technology, media, telecom) space. In the consumer space we have seen accelerated adoption of e-commerce due to the pandemic. Although e-commerce is now very big in dollar terms, there still remains a massive digitisation opportunity. Though penetration varies from country to country, in the US, about 80 per cent of addressable retail remains offline. This shows the extent to which we are really just getting started in this area, and the massive growth opportunities for companies. Similarly in areas such as gaming and entertainment, we are seeing continuing structural growth.

In the enterprise space, 2021 was the first year in the US where ''new economy'' technology - software, hardware, etc - became a larger percentage of total enterprise capex in comparison with ''old economy'' areas like structures and industrial equipment.

IT is increasingly critical to businesses. Even in a long-standing, widely recognised investment theme like cloud adoption, we still have a long growth runway ahead of us; cloud is still less than 20 per cent of US enterprise spending, compared to on-premise IT. In many countries we are even earlier in this digital transition.

There are sustainability issues behind certain tech sectors. How do you navigate these issues?

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We are fortunate at Fidelity in having access to leading fundamental research resources - our global analyst network - as well as dedicated ESG analysts. In terms of greenhouse gas emissions, the technology space scores relatively well in comparison with other areas of the market, although data centres are an area of increasing concern, given their growing workloads and energy use.

But a reason why technology is becoming mission critical to businesses is that it enables sustainability gains. Industrials and natural resource companies are making a concerted effort to digitise their operations, in part because it will allow them to better control and mitigate their environmental footprint. I am excited about an increasing number of IT businesses which are assisting firms in this area.

Given the heavy weight of Internet businesses in my fund - Fidelity's Sustainable Future Connectivity Fund - I consider it most relevant from an ESG standpoint to focus on digital ethics issues. I think these will become increasingly critical to how people assess sustainability in the tech space.

• Cybersecurity: What measures are companies taking to protect customers from fraud/how vulnerable are they to cyberattacks, ransomware, fraud, etc?

• Data governance: The extent to which businesses respect and safeguard users' personal data. Misinformation: whether or not Internet sites/social media apps are being used to disseminate false or misleading information (''fake news'').

• Ethical AI: Are companies considering or utilising an ethical framework for development and use of artificial intelligence (AI)? How seriously do Internet firms take online welfare issues (cyber bullying, suicide and self-harm promotion, etc)?

• Digital inclusion: What overarching policies do businesses have to promote a trustworthy digital ecosystem that leaves no one behind?

What is your stance on the Metaverse on which there is now a lot of buzz?

We have seen an increasing amount of chatter about the Metaverse. All the tech mega caps are investing in this and linked areas. I'd be very surprised if we did not see an announcement from Apple this year on the release of a new VR/AR product.

Likewise, Microsoft is developing VR-based collaboration tools. Though we are a way off from the Metaverse being mass market, I expect to see hardware, semiconductor and components makers as the first beneficiaries, and the businesses involved in things like headset and graphics processing unit production.

Over time we will see the companies that provide software, services and apps capture an increasing share of the Metaverse value chain. This is in line with my three-group conceptualisation of the ''Future Connectivity'' investment theme: ''Enabler'' stocks such as hardware and semiconductors are the first beneficiaries of connectivity trends. Then, ''Networks'' like telcos and other communications networks; and finally, ''Innovators'' - largely Internet firms which provide new products and services through connectivity networks. The latter group is where you tend to find stocks with the biggest long term growth opportunities.

Please share your perspective on tech valuations

There are undoubtedly expensive areas of the market - particularly among higher growth, more speculative (unprofitable) names. Valuations on some of these names have come down. Though I am a longterm thematic investor, I am not prepared to pay excessive multiples for growth. I look for underappreciated growth among companies with proven end markets and robust fundamentals.

Fortunately, there are still many reasonably valued stocks within my theme. Superior earnings growth versus broad global equities continues to underpin TMT strength. Tech business models are increasingly based on recurring revenue, and meetings we did last month with leading US technology firms highlighted the strength of their pricing power.

The pandemic led to a massive step-up in tech use by consumers and businesses. Though we have seen some drops in use in certain ''Covid winner'' stocks, I would also emphasise the ''stickiness'' of many of the connectivity trends stemming from the pandemic.

Whether it is technology to support hybrid working or new consumer services, the last two years have shown how reliant we are on technology across our working and home lives. This underpins the long term opportunity for investors.