Technology investments continue to grow at a very healthy pace. Most companies will use the new Trump administration Tax Cuts and Jobs Act (TCJA) to repatriate cash and step up investments in their digital transformation. We see a continued strong shift towards cloud computing. Important new drivers have emerged, including Artificial Intelligence, Cybersecurity and the Internet of Things.
In early March, we visited the Morgan Stanley TMT conference in San Francisco, and met with a number of core holdings in Silicon Valley to get an update on the overall demand environment for technology goods and services. The general tone of the meetings was flat out upbeat.
We continue to see very strong demand for technology goods and services. The technology sector is still very much a cyclical growth industry, and we do see a very strong backdrop in terms of both cyclical and secular growth. As TCJA will bring down tax rates for most technology companies, and the incentive to accelerate investments is strong, we expect an improvement in technology-related capital spending. The move towards cloud computing is in full swing. We remain very bullish on the prospects for the cloud pure-plays, and the companies that benefit from a migration from on-premise to cloud-based solutions.
In the current IT landscape, a number of new technologies are emerging that are driving growth. The first one, Artificial Intelligence (or Machine Learning), is actually not that new. To us, it is just an iteration of the trend towards Big Data, and the ability to perform predictive analytics on large volumes of data. Artificial Intelligence (A.I.) itself has been around for 30 years or more. The difference is that today we have more data, much faster memory and much higher computing power to leverage A.I. technology.
The move towards cloud applications and A.I. has significant implications for the technology architecture of companies, as A.I. requires a different data architecture, increasing processing power and tons of fast memory. We continue to see very strong demand for multi-threading applications, which are able to execute multiple processes at a time. Despite a seasonal slowdown in the first half of 2018, we also see continued strong demand for semiconductor memory.
We think that cybersecurity remains an important topic, as we are living in an increasingly on-line world, where the number of attacks will only increase. The trouble for most companies is that they no longer have the people or know-how to protect their own on-premise environments, and will be forced to move to the cloud for security reasons. The large cloud vendors are in a much better position to defend their networks against large-scale cyber-attacks.
New regulations in the EU (in particular the new General Data Protection Regulation, or GDPR) and the US are in the making. These will force companies that collect consumer data to improve data protection and data privacy. We expect these new regulations to be an important driver of spending on cybersecurity initiatives.
One of the things that surprised us most last year is the speed at which the Internet of Things (IoT) went mainstream. IoT simply means that more and more devices will be connected with each other wirelessly, and will share data over a network. While clearly very much hyped at the time, there is a lot of substance to the move towards IoT applications, in particular in the industrial and automotive business. Our cars have been connected for years, as they connect with our smartphones, register real-time traffic alerts, and offer emergency roadside assistance at the touch of a button. But the Internet of Things doesn’t stop there; in fact, many auto industry experts agree that it will not take long for fully autonomous cars to become available commercially.
These developments are driving very strong growth in semiconductor companies with exposure to those segments. Design activity is very strong, and the boom in automotive and industrial applications can lead to a sustained period of above-average semiconductor growth.
The outlook for technology investments continues to be very bright. The move towards the cloud is in full swing. Important, more or less new technologies, such as Artificial Intelligence, Cybersecurity and the Internet of Things are creating a range of exciting new possibilities and, consequently, opportunities for investment.
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