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Market watch

Outlook of Tech Sector – Competition and Reinvention Help Broaden Digital Transformation

Issue date: 2019-09-10

Franklin Templeton Investments

 

In 2019, as corporates seek to engage with their customers in a more service-oriented and data-centric manner, we see significant investment opportunities in the leading 'digital transformation' platform companies, as well as technology vendors that enable their customers to digitally adapt and transform. We believe digital transformation should drive strong revenue and earnings growth across the technology sector for many years to come.

Some examples of industries currently driving noteworthy digital initiatives include:

  • The legacy taxi industry, which is attempting to compete against popular ride-hailing services with their own mobile apps and software-centric dispatch services.
  • The brick-and-mortar retail industry, which has embraced e-commerce techniques to better service and understand their customers’ needs and streamline their inventory /distribution.
  • The music industry, which is more widely implementing music subscription services following years of resistance.

 

AI and How It will Affect Us

Artificial Intelligence (AI) or more specifically machine learning, is the ability to progressively improve performance on a specific task, or “learn” with data, without explicitly being programmed. It works by applying an algorithm to data to discover patterns and generate insights. Those insights refine the algorithm to produce increasingly better insights.

Several developments have contributed to AI’s leap forward, in particular the huge volumes of data that are now available thanks to the internet, social media and sensors associated with the Internet of Things.

AI is already in use in many applications we use on a daily basis. But we believe the opportunity that AI present is much bigger.

 

Individual Applications for AI:

 

Source: IDC. Worldwide “Semiannual Artificial Intelligence System Spending Guide.” March 22, 2018. There is no assurance that any estimate, forecast or projection will be realized.

Reasons to be Optimistic on the Tech Sector

Overall, we remain positive on the tech sector despite some potential headwinds.

  • Enterprise tech spending is already quite robust. We see a path for that continuing into at least mid-2019, which will be the first full year of budgeting that takes into account a robust economy and the recent US tax cuts.
  • Consumer tech spending appears stable amid expansion in services, new media and gaming offset by tepid growth in hardware such as smartphones and consumer personal computers.
  • Many of the world’s largest cash-rich technology companies headquartered in the US are still in the early stages of increasing their capital return programs as a result of US corporate tax reform with potential to grow.

However, there are certain risks that investors should be cautious about:

  • The magnitude and pace of interest-rate changes - If the US Federal Reserve moves too aggressively, the US economy could decelerate. While this would be negative for nearly all sectors, including IT and communication services.
  • The impact of the US-China trade war - If the situation intensifies, we see the greatest risk to enterprise IT hardware companies, which build their offerings in China for import into US.
  • Headwinds to China’s economy, as it appears to be slowing modestly - This will be a negative for domestic Chinese technology companies and could be an issue for global technology vendors with significant exposure to domestic consumption in China.

 

Copyright © 2019. Franklin Templeton Investments. All rights reserved.

Franklin Templeton Investments (Asia) Limited is the issuer of this document. The document, which is for informational purposes only, sets forth our views as of the date published. The stock provided is for illustration purpose only. It is not a recommendation to purchase, sell or hold any particular security.

The stock identified is not necessary indicative of a portfolio's holding at any one time. The underlying assumptions and these views are subject to change without notice. There is no guarantee that any forecasts expressed will be realized. Franklin Templeton Investments accepts no liability whatsoever for any direct or indirect consequential loss arising from use of this report or any information, opinion or estimate herein. This document has not been reviewed by the Securities and Futures Commission of Hong Kong.

 

 



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