AI has powered the comeback but which firms are ahead of the game? Expert dives into the much-hyped investment sector
While tech stocks experienced a significant drop during the Liberation Day low, triggered by Donald Trump’s escalating trade war in early April, performance has since rebounded sharply.
James Learmonth, a portfolio manager at Harvest Portfolio Group, says tech stocks have still delivered “very strong” performance this year. “Investors have really flocked back to technology in a way that I hadn't really been expecting at the lows,” he admits.
Despite this positivity, Learmonth, who manages the Harvest Tech Achievers Growth & Income ETF, urges caution, noting that ongoing geopolitical tensions still require a strategic investment approach.
“It’d be remiss if I tried to say that the technology sector wasn’t expensive on a price-to-earnings basis … but really, the technology sector is the only real place that we're seeing pretty significant growth,” he says.
AI powering the comeback
Much of this year’s momentum stems from artificial intelligence and the semiconductor industry, with the hardware side experiencing the best performance, Learmonth says. “Companies like Nvidia, AMD, [and] Broadcom have really been the key beneficiaries that have been able to monetize the spending on artificial intelligence,” he says.
According to Deloitte, the semiconductor industry is projected to reach US$697 billion in sales by 2025. If it maintains its forecasted growth rate of 7.5 per cent between 2023 and 2025, the sector could reach US$2 trillion by 2040.
In contrast software names have lagged. Many are still in the research and development phase of their AI strategies and have yet to fully monetize those solutions, Learmonth notes.
“[There’s] a little uncertainty as to what the return on investment is going to be for all the investments that they are making in building out those solutions,” he adds.
Geopolitics risks are still in play
Learmonth also warns that geopolitical tensions, especially between the United States and China, remain a real risk affecting tech stocks.
“It's very apparent that the US does not want China to have access to the most advanced semiconductors. The US really wants to be a leader in AI, not only from a commercial perspective, but also from a defense perspective. And so there's always the potential for more export restrictions to be put in place,” he says.
“We've seen it even going the other way now with the latest trade dispute [with] China, restricting exports of rare earth minerals to the US, which do play a role in [the] manufacture of not just semiconductors, but a lot of other electronics as well.”
Last month, the Trump administration further escalated tensions by restricting the sale of chips and design software to China as part of its ongoing trade war with Beijing.
Learmonth says because none of these trade disputes seem to be over yet, there is still potential for geopolitical risk to impact revenues and profits.
That said, there are still opportunities in the market. While AI remains the biggest investment theme, cryptocurrency and blockchain have also delivered strong returns. He also points to emerging long-term opportunities in quantum computing. Learmonth notes it’s still in the “infancy phase”, but there's a long-term investment case - mostly confined to small- and mid-cap names.
The main concern tech investors should watch for right now, Learmonth believes, is that index-based products can be heavily skewed toward large-cap tech names such as Nvidia, Apple, and Microsoft, which make up a sizable portion of the index.
If geopolitical risks come into play, those indexes can be vulnerable to concentration. That is why, he says, Harvest takes a different approach.
“We kind of advocate towards more of an equally weighted approach. That’s what our Tech Achievers ETF does. So, you don’t get the same single-name concentration, while at the same time getting exposure to the tech sector,” Learmonth says.
