Positioning for 2025 – the year ahead in tech

CR : Hello and welcome to Silicon Valley Byte Size, an update on the tech sector from the Allianz Technology Trust. I'm Cherry Reynard, and with me today is Mike Seidenberg, our manager of the Trust. He'll be talking through the outlook for the technology sector in 2025 and how he's positioning the Trust to take advantage. So welcome, Mike.

MS: Good to see you, good to hear you.

CR: So, let's start with a sort of big picture, you know, what do you think will be the key issues in the year ahead?

MS: Yeah, I mean, we enjoy every year, and I can tell you, whatever I say it's probably going to be different 12 months from now, but I think that we're seeing some fairly major trends emerging in technology. Obviously, there is this just uber focus around artificial intelligence and what it means to not only companies, but countries and people, etc. and that's not going away. I mean, we've seen company after company report and really talk about what that means to their business going forward, so I think that's probably the biggest theme in the spotlight. But obviously, around the periphery, as technology becomes more ubiquitous in our daily lives, we're just seeing companies continue to respond to their customers making sure that they are able to meet them in the medium that is most relevant, right, because ultimately, and I say this a lot, as somebody who worked in sales prior to business school and actually worked in sales at Oracle, many decades ago, the less friction you can have between you and your customer, the better chance there is that that money gets deposited in your account. And I think that that's something that companies are acutely aware of and if you don't respond in the right manner, you can become very much irrelevant to your customers, and I think here again I would speak to both business to business and B2C, a business to consumer on that, sorry, I'll try not to use too many acronyms, but I do think that's something that continues to persist. And then we have all the other things that are going on around us, right? Whether it's autonomous driving, I mean, it's just amazing. I live in San Francisco, which we just feel like is a great competitive advantage for the Trust and this morning I was walking my dogs and, I walk outside, it's, 7 a.m. in the morning, there was a Waymo in my driveway, which is an autonomous driving car with no driver, with no person in it, and it was waiting to pick up my neighbour, and you just see them everywhere and in fact, I take them myself and it's really a great experience. So, like not to drone on, but there's just so many things happening in our lives, and technology is really at the forefront of many of those things, and it isn't just around technology, if you think about what technology is doing for health care in other aspects of our life. It's just a pretty exciting time to be an investor, and there are obviously some headwinds, right? Economies are tougher, governments are trying to figure out what do they do with it, how do they tamp down inflation. So, I would say there's some tailwinds and there's some headwinds, but in between, given the way we run the Trust, we should be able to find opportunities for our investors.

CR: Yeah, I can't believe autonomous driving is now like a real thing and it's really happening. The one thing that you didn't mention there was the new administration in January…

MS: Sure.

CR: Possibly deliberately.

MS: But I wasn't deliberate. I mean, obviously that would be, yes, go on with your question. It wasn't deliberate, it just, I figured we would get to a question around that.

CR: Yeah, yeah, absolutely. I mean, Obviously, it's all slightly speculative at this stage, but how do you see the tariff regime playing out for the technology sector. I mean, could it have an impact on supply chains, for example, and is that something that you're looking at?

MS: Oh yeah, it's something we think a lot about and obviously the new administration has really been fairly vocal about a series of tariffs, and obviously, based on some of the economic data, inflation still is pretty persistent, so I think that's a balancing act that the administration is really going to need to think through with respect to what does that mean to our economy and obviously, from a supply chain perspective, I mean we are seeing countries on shore more, and that is a process that takes time, obviously you have companies like Taiwan Semiconductor, building FABs, semiconductor fabrication facilities, sorry I'll try not to use too many acronyms, in the likes of places like the United States and in trying to do that in Continental Europe, but, ultimately we did a study on this for the Trust. Ultimately, it is a global supply chain, and if you enact tariffs on that supply chain, they're going to be ramifications that aren't necessarily good ones and there could be some unintended consequences. So, I'd like to think that we're living in a world where we can solve some of the challenges minus, draconian tariffs, but it's TBD and it's something that companies are going to have to deal with, similar to the challenges they had during the pandemic with supply chain, but I think you'll see companies react very quickly if they have to move around suppliers due to tariff issues, but hopefully there can be a resolution that isn't, that doesn't really impact everybody so dramatically.

CR: And what about, I mean, the other big topic is valuations. I mean, particularly for the kind of mega-cap end of the market. What's your view on that today? Are they stretched? Is there further to go, possibly?

MS: So, just take a step back and think about these companies. Firstly, they're amazing businesses, right? And they really have done just a phenomenal job of positioning themselves to be in the right sectors, and that's not easy to do because we've seen many companies, in my career, falter and I've been just thoroughly impressed with the strategies from the likes of some of these, and they are expensive and I would tell you they're expensive for a reason. Will they persist? Will the valuations and the leadership persist? I really don't know, in that, I’ve been surprised by the relative strength over the past few years of these businesses and it's one of the reasons why the Trust actually has more exposure to companies like that today, than we have traditionally, from a portfolio perspective, but these businesses are leaders in so many of the themes that we've talked about. So, from a valuation perspective, they're expensive. I understand it. Do I think that their multiples can expand? I think that's a much more difficult question, but let me be really clear, I don't see them falling off a cliff, right? I mean, just given where they sit, I think the biggest risk for a lot of them is regulatory oversight, and it's one of the reasons why we've traditionally been underweight mega-caps. If you go back historically and look at the Trust, as companies become that large, we traditionally reduced our weight, due to mainly just kind of regulatory oversight.

CR: I mean there have been in, in the sort of back end of 2024, there does seem to have been a rotation away from the mega-caps, or at least a broadening out of market leadership. Is that true?

MS: I think you've seen a variety of companies report recently that aren't, in the names that you think of that, I'll use Broadcom for an example, excellent company, amazingly well run, we actually took the board of the Trust to meet with the CEO when they were out in San Francisco earlier this year. Excellent results, well positioned, not something that everybody thinks about, and yet, is in that kind of, starting being the conversation of a mega-cap and it is a mega-cap and so we've seen leadership emerge from some other companies, but here again extremely large. But to your question about the market broadening out, we have seen that. Look, I would tell you, it's a fairly specific market with respect to areas that are doing well, but it's very healthy for the markets to have a broadening. You don't want a narrow market that typically results in a fairly challenging situation over time. So, we have seen a broadening now in the back half of the year. I hope that persists going forward. I think we have a more pro-business administration coming in in the US, so that should help, I think you'll see a more active M&A, trajectory in the markets because I think that regulatory, you'll see some loosening around what companies can buy potentially. So, feeling better about the year – just met with a bunch of companies at a conference a week ago, and I'd say generally speaking, people are entering ‘25 more optimistic about their business than they were in ‘24. But, there's still a lot of moving pieces out there that companies are trying to figure out.

CR: What about the, I mean, you talked about AI earlier. Where is that going next? I mean, you feel it's been very focused on the sort of infrastructure build-out to date. Can you see that changing at all in 2025?

MS: I mean, I'm not so sure it'll change dramatically in ‘25 because these things take time, but I do think you'll see, as that infrastructure is built upon, you will see companies execute on the ability of what it means to their products and customers. So, yeah, I think you will see more application as things move into production. We saw a similar phenomenon, if you go back and think about the cloud, where, early on, a lot of the cloud was used for test and development workloads, and then as that became a more reliable infrastructure, companies moved that to production, right? And today it's just, … there's no question about whether or not we can run a cloud app in production, we can. I think you'll see a similar trajectory with artificial intelligence with respect to, you know, as people apply it to their products and services, I mean I think like most things in technology, that curve, the steepness of that curve tends to be steeper cycle over cycle for many of these kind of what I call your secular themes. They tend to, because companies just move quicker, I think you'll see a fairly rapid adoption there.

CR: And then you talked a bit earlier about some of those innovations beyond AI. I wonder if you could just run through those again and just talk about it in a little bit more depth.

MS: Yeah, I mean, I think that, yeah, I think I was talking about that to continue meeting your customer and the consumer where they want to meet. I mean that's just movement to digital, right? That's something that we've talked about for years and years and it continues to persist. Look, I think that, given the world we're living in, you can't not talk about cybersecurity, right? It just - it is a key ingredient to everything in technology, and it remains something that is top of mind for companies in countries, and I think I read in the US they're thinking about potentially having its own branch within the services, within the military services. By the way, other countries have that. So, I mean I think cybersecurity is something that remains and will remain a really important theme of technology investing. And then you just have all the really interesting things that you're seeing, whether it's autonomous driving and what that means to infrastructure, oh sorry, kind of consumer infrastructure and business or you've kind of started moving people around - I skipped over my words, but that's something that, that's interesting to us, and then you're just seeing technology just applied to so many things that you used to not see it applied to in a really easy to use manner, and that's just, that's just a good thing, right? If you think about, think about technology and what it means to someone who has diabetes and all these other kind of persistent diseases that need to be managed. I mean, technology is really a friend there, so I mean, I think that these are really interesting times for a technology investor and just seeing the broad scale use of it across industry.

CR: Just in the final few minutes, are you assuming a reasonably benign economic backdrop? I mean, the Fed just cut rates again, which sort of should be supportive. It looks like a more, as you say, a more pro-business administration. Are you assuming that growth would be reasonably buoyant?

MS: I mean, I'm not really assuming growth is going to be great, primarily because I still think inflation is something that we're working on and we heard that yesterday, today is December 19th and in the Fed put out a statement yesterday on the 18th of December, that definitely caught people by surprise, it's just been harder to, kind of, hold inflation in check, and yes, we are going to see rate cuts, but we might not see as many as we thought next year due to the fact that there's still just a variety of things that challenge us and look, if I think about the rhetoric around this deportation and what that means, look, that means, you're going to have to pay people more, cause a lot of the jobs that are ostensibly may free up due to deportation in this country. First of all, I would argue that they’re jobs that not many people want to do, and if you're going to pay somebody to do them, you're going to have to pay a lot of money. It is really hard. Like, I walk around our neighbourhood, I can tell you, some of these jobs are, are backbreakingly hard and it's no different in the UK and continental Europe and globally. So, look, I think that's something , I think that we need a solution to some of the challenges around immigration, but I also think that be careful, and not to mention, it's super expensive to deport people. I mean, that's not, that's not something where you can, you can do cheaply. So, there are a lot, there are a lot of things on my list of worries that I worry about. Here again, I would go back to the fact that our job as a team is to find tools and technologies that, from a bottom-up perspective with a macro overview, and that's something we've run the Trust, we've run the Trust this way since I've been associated with it, and that's a long, long time. But we really want to be fundamental investors with a macro-overview, which means in all environments we should be able to find opportunities for our investors.

CR: Absolutely. And, I mean, I guess just finally, perhaps, could you talk a little bit about where you're finding those opportunities at the moment, any key things you'd highlight from the Trust positioning at the moment.

MS: I mean, look, we have large positions in areas around semiconductors, that are specific to some of the trends we're seeing, right? That's not surprising. I spend a lot of time talking on this podcast about that. It's not broadly across semis, but it's areas that we feel like are really beneficiaries of spend. I would say on the software side, we've added some exposure to software from where we were mid-year, that's a sector we traditionally really like, we like the characteristics of it. Cybersecurity remains a persistent theme for us and something that we've had exposure to for a number of years and remain very convinced that that is an area of spend, and then we found some really interesting opportunities in the internet, this past year, um, that we're excited about. , we've seen some companies come public in the last, in the back half of the year (2024) that are really interesting businesses. So, yeah, I feel like it's a fairly interesting environment for finding ideas and ultimately, our challenge is to make sure the risk reward works, right? And here again, going back to that framework of bottoms up with macro overview and then just finding companies in some sectors that we're excited about.

CR: OK, great. Thank you, Mike. We will wrap up there and thank you so much to our listeners for tuning in. You can find out more about the Trust at our website, www.allianztechnologytrust.com. Until next time.