Investment Manager’s Review
At the start of 2024, a raft of major elections threatened significant volatility for economies and financial markets. In the end, most elections passed without incident, although the ramifications of a new policy agenda in the United States are not yet clear and could be a disruptive force in the year ahead. Fragile geopolitics has undoubtedly remained a source of instability, but for the most part, the economic backdrop has been stable.
The International Monetary Fund (IMF) estimates global economic growth at 3.2% for 2024, just 0.1% lower than 2023 and forecasts 3.3% for 2025. Economic activity has been helped by an easing of inflation, which has dropped towards official targets, allowing central banks across the world to cut interest rates. Supply chain pressures have eased, and consumer confidence has been sustained. At the same time, megatrends such as artificial intelligence (AI) have supported corporate spending.
Canada became the first G7 nation to cut rates, with the European Central Bank swiftly following in June. The US Federal Reserve (Fed) finally acted in September, surprising the markets with a 0.5% reduction: it cited growing concerns over the health of the US labour market. This was followed by two 0.25% cuts in November and December. However, at its last meeting of the year, the Fed warned it would slow the pace of rate cuts in 2025, with the minutes suggesting it was “at or near the point at which it would be appropriate to slow the pace of policy easing”.
Japan was the only major country to buck the trend for falling rates, finally exiting its below-zero interest rate policy. By the end of the year, there were tentative signs of a revival in inflation in the US, and bond markets began to pare back expectations for significant further rate cuts in the year ahead.
The US dollar appreciated for the first half of the year as the domestic economy continued to show resilience in the face of higher rates. As recessionary fears mounted in the summer, the dollar weakened, before rebounding as these fears appeared overblown. Donald Trump’s victory and the Fed’s more cautious stance on future interest rate cuts provided a further boost, with the Dollar Index, a measure of the currency’s strength against its major trading partners, hitting a two-year high. While the Japanese yen weakened against the dollar, it appreciated against the euro, reflecting a growing divergence on interest rate policy between the two economies.
Commodity prices were mixed. Rising geopolitical tensions in the Middle East pushed oil prices higher in the early part of the year, with Brent crude nearing $90 a barrel, compared to just under $80 at the start of the year. However, prices later eased back towards $70 a barrel given abundant supply. In contrast, gold prices soared, reaching a fresh record high of almost $2,800 an ounce in late October. Demand was supported by central bank buying.
It was a strong year for global equity markets in 2024, with the MSCI World Index gaining 19.2% over the year, after rising 24.4% in 2023. Markets were supported by the fading risk of a US recession and the turn in interest rate policy. Stock markets were also given a boost in November with a victory for the Republican party in the US elections. Investors are anticipating that a blend of tax cuts and regulation will boost corporate earnings in the years ahead.
At a sector level, excitement around AI continued to support the ‘Magnificent Seven’ (Amazon, Alphabet, Apple, Microsoft, Meta, Nvidia and Tesla), which delivered a return of over 60%. Nevertheless, there were nuances within this. Nvidia, for example, comprehensively outpaced its peers, after delivering strong earnings through the year. Elsewhere, it was also a strong year for consumer discretionary and financials stocks. In contrast, materials and healthcare were the weakest sectors in the MSCI All Countries World Index.
Towards the end of the year there were signs of a broadening out of market leadership. The Russell 2000, for example, which focuses on small and medium sized US companies, rallied in the immediate aftermath of Donald Trump’s election victory, with investors hoping his policy agenda would support smaller, more domestically focused companies.
Yes, there has been progress in AI-powered tools and applications impacting chips, software, hardware, and other technology industries. Generative AI, which uses artificial intelligence to create new content, saw a significant spike in interest, with a notable increase in job postings and investments. The capabilities of large language models expanded, processing larger amounts of data across multiple media such as text, images and video.
Cybersecurity remains a crucial sector. 2024 saw a range of new threats emerging, including the rise of AI-powered attacks. AI was used for automated phishing, malware generation and sophisticated social engineering campaigns. Security teams have met fire with fire, deploying AI-driven tools to detect anomalies and automate responses. The adoption of Zero Trust Architecture and the focus on cloud security were also notable trends.
Cloud computing has been a long-running theme in the portfolio. Cloud computing provides seamless access to servers, networks, storage, development tools and applications via the internet. Instead of companies’ significant investments in equipment, training and infrastructure maintenance, cloud service providers assume these responsibilities. This allows companies to ‘right size’ technology infrastructure to business needs rather than going through costly investment cycles. The migration to cloud computing continued to grow, with 65% of technology decision-makers anticipating an increase in cloud spending over the next year.
We would also highlight the Internet of Things (IoT) and 5G. The IoT connects devices and systems, enabling them to communicate and share data. This connectivity is used in homes, cities and industries, delivering smarter, more efficient operations. It is used in agriculture, for example, to monitor climate patterns and adapt fertiliser or pesticide use. 5G, the fifth generation of wireless technology, provides the high-speed connectivity needed to support the massive data exchange and real-time communication required by IoT devices.
Certainly, both have the potential to disrupt a number of industries and financial systems. Blockchain technology provides a decentralised and secure method to record transactions, which can enhance transparency, reduce fraud and improve efficiency. Cryptocurrencies, on the other hand, offer an alternative to traditional financial systems, enabling peer-to-peer transactions without the need for intermediaries.
The semiconductor sector was an important contributor to overall returns. While Nvidia saw strong gains, it did not contribute to relative returns because we had a below benchmark weight (10% versus 12%) due to risk management constraints. More important for relative returns were our weights in companies such as Taiwan Semiconductor Manufacturing Company (TSMC) and Broadcom, which returned 95.4% and 114.2% respectively. TSMC is not in our benchmark, and we had almost double the index weighting in Broadcom.
The largest sector contribution came from our holding in software companies. We had an overweight position in the portfolio (relative to the benchmark), and our stock picking approach was strong. Holding an underweight position (relative to the benchmark) in hardware companies also contributed to relative returns. Weakness has tended to come in idiosyncratic areas, rather than from any major themes. However, IT services was a difficult area for the Company over the year.
It is also worth noting that concentration in the top 10 stocks has increased over the past three years. The dominance of the ‘Magnificent Seven’, coupled with a narrow technology market has seen us use a larger amount of capital to invest in some of the mega caps. This was done to preserve performance, knowing that as the market broadens out, we will use capital from these larger positions and redeploy it into new names among large and mid cap companies.
Palantir Technologies provided the largest relative contribution to the portfolio over the year. It was a new buy in August. We liked the company’s leadership position in big data and in the field of data analytics, with a range of products and services. Shares rallied on the continued momentum for AI-related applications as well as news that it would be added to the S&P 500 Index. This should increase liquidity in the stock. We continue to hold it, with the shift in IT spending towards AI showing few signs of weakness.
Microsoft was the one weak spot among the ‘Magnificent Seven’ over the year. We had a significant underweight position versus the benchmark – 8.2% against 14.6%. The group remains a world leader in software, cloud storage and security solutions, and an undoubted pioneer in AI. However, its earnings statement was accompanied by lower forward guidance amid capacity constraints and moderating growth, and as a result we currently intend to maintain a structural underweight.
The final position of note was in Intel Corp. We had an underweight position in this legacy chip maker and then exited it in full at the start of February. Its shares were hit by weaker-than-expected earnings and a lacklustre forecast. The company has lagged behind several of its chip-making rivals in terms of revenue and innovation. The departure of the company’s CEO created further uncertainty toward the end of the year. We keep an eye on the stock, but other chip makers have better exposure to AI and other leading technologies. In our view, once a company is behind in the semiconductor industry, it is difficult to catch up.
Recent new holdings have included Marvell Technology, a developer and producer of semiconductor and related technology across security and networking platforms, secure data processing and storage solutions. It is making important strides in improving the design of its chips and is attracting interest from the hyperscalers.
Point-of-sale, cloud-based restaurant management software maker Toast is another recent buy as the company made some interesting product developments. Social networking platform Reddit was another buy in the latter half of the year, plus Paypal, where a revamped management team and new product platform are helping it gain market share.
Another purchase of note was Atlassian Corp, a designer and developer of an enterprise software platform for project management, collaboration and support services. It continues to see a strong pipeline of growth, with product upgrades and migrations to its cloud business.
Our largest detractor was MongoDB, a document database provider which allows the storage of structured or unstructured data. This makes the development of applications more agile. However, its shares dropped after it issued a weaker-than-expected outlook. This combined with some overall weakness in the software sector. The company’s more cautious stance on growth reflects an overall softening of IT spending among clients and some near-term sale execution challenges. We trimmed our exposure to the stock during the period.
AI is creating a new wave of technology innovation every bit as exciting as the Internet. AI has the power to reshape the global economy, changing the way companies operate. This year promises even more groundbreaking AI developments, plus favourable regulatory changes and rapid digitalisation.
In 2025, we expect AI spending to shift from infrastructure development to include more software and services as the use cases for AI emerge and expand. This expansion should drive efficiency gains, spark innovation and create new business models. For example, autonomous systems such as self-driving cars, drones, and robotics have the power to revolutionise transportation, logistics, national security, medical treatment and factory production.
In cybersecurity, AI is becoming a powerful tool to detect anomalies, predict threats and automate responses to attacks. In advertising technology, AI is delivering personalised consumer experiences, optimising advertising spending and creating dynamic advertising campaigns that are faster, better targeted and more cost-efficient.
The year ahead is likely to see both headwinds and tailwinds as the new US administration policies could be more unpredictable than previous administrations. On the one hand, we are likely to see more merger and acquisition activity as interest rates trend downward and the US welcomes a more relaxed regulatory environment and companies are gearing up for strategic acquisitions to fuel growth and expand market share. Conversely, businesses like predictable policies which provide clarity and things like tariffs can create pause in the spending environment.
There may be more volatility in the semiconductor sector in the year ahead as a result of geopolitical tensions, policy shifts and supply chain disruptions. Restrictive export controls, tariffs and national security concerns may conspire to create a bumpy ride for the sector in 2025. However, this volatility also presents opportunities. AI-driven data centre spending is strong and supply-constrained in key areas, while cyclical semiconductor companies (including personal computers, handsets and industrial companies) with limited AI exposure are navigating an inventory correction, and there is the potential for a recovery later in the year.
The momentum from key growth trends such as AI and digitalisation, coupled with a more favourable regulatory environment and a boost in merger and acquisition activity, should support the technology sector in the year ahead. Looking even further ahead, exciting developments in areas such as quantum computing, augmented reality, artificial general intelligence and space exploration are on the horizon. However, this needs to be tempered with the risks around geopolitics and supply chains and highlights the need for disciplined risk management.
Our focus is on building the portfolio from a bottom-up perspective with a macro overview. Technology is a key enabler across almost every industry, and we will continue to seek out stocks that solve difficult problems and deliver long term share price growth.
Mike SeidenbergLead Portfolio ManagerVoya Investment Management Co LLC12 March 2025
Photo: TSMC
Quantum computing: Google's 54-qubit Sycamore processor. Photo: Google
