Shannan:

Hello, everyone. I'm Shannan Simmons, PineBridge’s Global Head of Consultant Relations and Head of Business Development for the Americas. I'm delighted to be joined again by Rob Hinchliffe, Equities Portfolio Manager and Head of Global Sector Cluster Research, and John Song , Equities Research Analyst focused on the tech sector, for today’s discussion.

Welcome back. We're thrilled to have you both here again to talk about what's been happening in your markets. We'll cover where you're seeing opportunities as well as headwinds, and revisit your team's style-neutral approach, focusing on company lifecycles. Welcome Rob and John. Thanks so much for being here today.

John:

Thanks for having us, Shannan.

Rob:

Thanks, Shannan.

Shannan:

In our last episode together, we discussed the prolonged dominance of the Magnificent Seven companies, or “Mag Seven” as they've been nicknamed recently. With Trump's return to the White House, the market anticipates that his policies will be pro-growth and favorable for equity markets. How will this impact the technology sector? Perhaps John, you can take this one.

John:

Thanks, Shannan. So, the market's initial reaction to the election was probably overly optimistic, but we do view Trump's policies as an incremental positive for the tech sector: a pro-growth agenda focused on deregulation. Deregulation could create a more favorable environment for enterprise and SMB [small and medium-sized business] spending. This should help accelerate our recovery in key areas, such as software and cloud investments, which have seen some softness over the past few years. And as enterprises ramp up their investments, we also expect increased spending on PCs and smartphones, which has also been weak over the past year.

On the antitrust and M&A front, I wouldn't expect a big shift. Trump has pretty populist tendencies and then has a history of targeting large tech companies. So that suggests we'll still see some scrutiny, but maybe less aggressive enforcement versus the Biden administration. M&A activity might not skyrocket, but the environment should be a bit more permissive compared to recent years.

Shannan:

Thanks, John. Looking back at the last year, we have observed a significant shift in the market leadership in Q3, with investors moving out of mega-cap tech stocks. However, they rotated it back shortly after. What factors drove these shifts away from and back into the Mag Seven names? And do you expect more market shifts to occur in 2025, especially in a world transformed by major global elections last year?

John:

In terms of the tech-specific reasons, it was a couple of issues. The biggest was probably the growing debates around the sustainability of the AI investment cycle, specifically questions around ROI, as we weren't seeing any major signs of monetization to justify all the spending yet. Then there was also news about the potential delays in Nvidia's new product launch that was key to enabling these investments.

And then this was compounded by the concerns on new export controls to China, and then some of the disappointing Q2 earnings results that led to some profit-taking from the AI winners. And then eventually we saw a rotation back into these names as we received more clarity on the hyperscale capex plans and then saw a resolution to the Nvidia production issues.

For 2025 we'll probably see more of these shifts, as the market will remain sensitive to sentiment swings tied to AI adoption trends. Right now, the debate has been around the scaling limitations, which is a similar but a little different debate that impacts AI capex, and then also the regulatory actions that are always going to be around each year, around the export controls.

Shannan:

Rob, perhaps you can answer the same question, but from a portfolio perspective?

Rob:

One thing we've learned over the last several years is that we do see sentiment shifts, particularly when governments get involved and regulations come into play. So we certainly expect the volatility to continue. So, from a portfolio management perspective, we don't want the portfolio to be susceptible to these sorts of rotations. We spend quite a bit of time making sure that our position sizing for each of our investments, or even groups of investments where that's relevant, minimize our exposure to risks that are not alpha sources for us.

Shannan:

Thanks, Rob, and another question for you. Another area of focus for investors is US trade policies, with concerns about higher tariffs and potentially more stringent restrictions on high-tech exports to China. Will Trump 2.0 hinder markets or offer opportunities in the US and elsewhere?

Rob:

Great question, and I think John can help answer this one too. So aside from the headlines, there's not a lot of details yet on potential tariffs: the countries that could be impacted, the products, the size, timing – things like that. So, our job is to try to understand the exposure to what might happen, understanding the supply chains, what they look like, how they've changed. This is where we've spent our time. What we've done is ask ourselves, are companies potentially exposed to tariffs, and do they have flexibility from competitive positioning out of their supply chains compared to peers?

In other words, is everyone in the same boat, or are some companies better or worse positioned? And what's their competitive positioning as it relates to pricing power? Who has a better ability to pass on higher costs, in other words?

So, we want to construct a portfolio so that it's not getting whipsawed around by this market volatility, kind of similar to the last question, while simultaneously allowing our individual stock investments to drive performance.

John:

For the export controls specifically, I don't expect the big departure from the policies we've been seeing under Biden. Biden's administration has already implemented stricter and more targeted restrictions compared to Trump's first term.

The one key difference has been Biden's tendency to communicate the policies more openly prior to implementation, which allowed companies to better prepare for potential disruptions. Maybe under Trump, we go back to being a little less predictable again. So, that being said, we can see some opportunities open up that can help offset some of these headwinds. Stricter export controls could accelerate investment in domestic semiconductor manufacturing, which could create some new opportunities for the suppliers.

Shannan:

Thank you both. In our earlier discussions, we talked about your team's Lifecycle Categorization Research framework. Your proprietary framework values a company's future prospects by identifying those you think will be better positioned versus what the market expects. This contrasts with the traditional way of grouping stocks by sector, which, from your team's perspective, doesn't offer a consistent method of evaluating companies. Considering this, are there any notable investment themes you'd mention?

Rob:

That's right, Shannan. In our view, the traditional way of thinking about stocks by grouping them in sectors doesn't offer a consistent way of evaluating companies. There's such a wide range of different types of companies in each sector; you simply can't evaluate all consumer discretionary stocks, for example, the same way. Toyota, Tesla, that's sort of the regular example I give: very different companies, but both car companies, both consumer discretionary stocks.

So, we use our Lifecycle framework to group companies by their maturity and cyclicality, and we have different evaluation criteria for each of our Lifecycle categories, and this helps us to evaluate companies based on their characteristics and identify differences of opinion between our view and the markets’ view of a company.

Now, with respect to the themes that you asked, I don't think we're a thematic portfolio. That said, a look at our holdings right now clearly highlights a few areas where we found what we believe are investments that are underappreciated by the markets. John mentioned AI. We have investments here that include semiconductors, semi-cap equipment, data centers, and companies that also benefit from using AI. Factory automation and near-shoring is another area we think many of these companies have yet to bounce back from the pandemic.

They could benefit from renewed management optimism following the election, and they could also be beneficiaries of tariffs, too. And then I also want to mention that a focus on efficiency is widespread across our investments. Companies that help their customers reduce costs – things like labor, capex, energy costs – companies that can help their customers reduce those expenses are also interesting.

Shannan:

Really interesting points, Rob, and given his imminent return, we will be following further on the impact of the Trump administration’s policies as they take effect in our next episode with you and your team. With that, thank you both again for your time today and for the interesting discussion and perspectives. Until then, for more of our market investing insights, please visit our website at pinebridge.com.