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Investing in tech stocks and the digital shift – an HL fund manager’s view

Steve Clayton, HL Fund Manager, shares his views on the importance of digital technology when picking stocks.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

This article is more than 6 months old

It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.

We live in a digital age. We’ve had computers, the internet and smartphones for a while now. And Artificial intelligence, machine learning and 5G networks look set to be the next big things to use data to transform our lives.

In a world of uncertainty, one thing seems clear to me. The world is always going to become more digital. People won’t start using less internet next year. Data collection, analysis and interpretation won’t just slow down. And the number of activities that are automated will only increase.

And it’s not all just about social media and eCommerce – the first things that often spring to mind when you mention digital technology. We can use data to make things like traffic management on the road and sky, or factories work better.

Throughout history, labour has been replaced by automation. The Spinning Jenny displaced untold thousands of textiles workers and two hundred years later the PC made lots of secretary roles unnecessary.

This isn’t a cause for alarm though, but celebration. New capabilities emerge, employment grows, even if the jobs themselves will change.

Technology has enabled new business models to emerge, transforming industries and creating new ones altogether. With the power of data advancing every year, the boundaries of what’s possible stretch further.

And I think it will only accelerate.

This article isn’t personal advice. If you’re not sure if a course of action is right for you, ask for financial advice.

Do tech stocks still have potential?

The growth made possible by advances in tech has allowed the shares of lots of technology companies to perform ahead of their peers in more traditional sectors in recent years. The leading stocks have seen their market values rise into the trillions of dollars.

The HL Select team has always tried to back digital winners when we build our portfolios. We think it’s better to invest in the future than the past. We saw this during the pandemic, when it became clear that businesses and ordinary people were quick to adopt new technologies in response.

As major economies start to reopen, the impact of shutdowns upon supply chains has revealed shortages, worsened by businesses which slammed on the brakes on expansion plans. Workforces are being hastily rebuilt in sectors like hospitality, and there are signs of wages pushing up where bottlenecks are found.

There’s a sense that inflation could be around the corner.

My views on inflation and how to beat it

It’s true that lots of companies that struggled in lockdowns will be keen to try and recoup lost sales. And, there’s plenty of evidence to show holiday let prices are soaring.

But demand is unlikely to be so high once borders are fully reopened.

I believe that technology is a powerful deflationary force, which drives down costs. And once the adjustments to the newer normal have taken place, this will take control again.

Right now, we have a situation where the prices of shares seen to benefit from a return to inflation are performing well, while some technology company shares are coming under pressure.

We can see this most clearly across the pond in the US, where the technology sector is much larger than in the UK.

It’s one of the worst performing sectors in the US so far this year, while ‘old economy’ energy and materials stocks are leading the charge.

Value or growth stocks – which should you look for?

This is often described as a return to favour for ‘value’ stocks, after a long period when ‘growth’ shares were in vogue.

I don’t like these labels. Just because a share is lowly rated, trading on a modest multiple of earnings, says nothing about whether it’s good value or not.

What matters is whether those earnings will grow, stagnate or fall. There have been plenty of ‘value’ shares that have proved rather expensive over time, because the business was actually in decline.

Equally ‘growth’ is often used in the same sentence as expensive. Again, I think this is too simplistic. If an ‘expensive’ growth stock delivers enough growth in the future, it will turn out to have been offering excellent value to the investor.

It’s unusual to see investors rushing away from fast-growing industries and towards those that stand in the face of the headwinds of climate change and environmental standards.

We should also be wary of placing too much faith in highly cyclical banking shares. By cyclical we mean ones that rely on a strong economy to do well. The reason that the UK has a growing fintech industry is because they see so many targets to attack within traditional banks.

When we pick stocks for the HL Select UK Growth and HL Select Global Growth funds, we focus on the long term. We want to be sure that companies we back can grow for years to come.

That means buying businesses that we believe are future-proof and able to thrive in an increasingly digital world.

That’s not the same as saying we only invest in tech stocks, far from it. We always diversify our funds across a range of sectors.

But we try to identify the players in each industry we think can profit from technology and avoid those we think are likely to fall victim to it.

HL Select UK Growth key investor information

HL Select Global Growth key investor information

Steve Clayton is a fund manager of the HL Select range of funds.

HL Select Funds are managed by our sister company HL Fund Managers Ltd.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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