How do you see the possible recession and the impact on the technology sector?

From Franklin Templeton, who has been in the investment world for 75 years, we share two reflections. The first would be that we have already been through ten recessions, and the good news is that after these recessions we have recovered and the markets have recovered. The second reflection is that there are different types of recessions, recessions that are milder, stronger… In this case, we think that the recession is going to be moderate because the American consumer, who represents 70% of the American GDP, has reached in pretty good shape at the moment. On the one hand, the labor market is strong with very low unemployment; on the other hand, the level of indebtedness of the houses is the lowest of the last 50 years, they do not have many credits; and, finally, the level of savings with which it has arrived is important, since during the time of Covid it has spent less money and that makes us think that the recession is going to be moderate. How will it affect the technology sector? For software and high-quality service companies, we think that it will be difficult for them to generate new business in a period of recession; however, we believe that it will be relatively easy for them to renew the contracts they already have, especially in those businesses that are they run companies and it has become the day-to-day for running them. For businesses that are more cyclical, such as hardware or semiconductors, as we come from a period in which the supply chain has been broken, the requests for material have been important throughout that period and next year we will see that all this is going to arrive and generate recurring income. In a time of recession at Franklin Templeton we look for high quality companies that are leaders and have competitive advantages, to help them gain market share in a time of recession, we look for companies that are well capitalized, and lastly, with the ability to transfer prices to the customer and also generate recurring income.

What are the reasons for the falls in the technology sector?

I think there are three main reasons why tech stocks are falling sharply. The first is interest rates, since when calculating the value of technology companies, as they have significant future income, an increase in interest rates causes valuations to fall. On the other hand, now that we are in a difficult time for the market, those companies that invest more in their businesses, that are not reducing costs, are being punished, and this is the case of technology companies, which need to invest to generate returns for to the future. And on the other hand, the reopening of economies means that we spend more and more leisure time outside our home and spend less on online or digital business.

Are tech companies cheap?

To know if they are cheap, we have to put two things into context: the price at which these companies are trading and the profit capacity that these companies will have in the future. On the price side, we have seen a strong punishment in technology companies, one of the largest in history since many of the technology indices have fallen by more than 50% and many of the technology companies are trading at pre-existing levels. pandemic. As for the profits of the companies we have in our portfolio, the estimated profits for the next 3-5 years are around 30%. Is this going to be damaged by the recession? Yes. Historically, a mild recession has caused profits to be cut in the US stock market by 25% and in a strong recession by 50%; here the key is to choose the companies that are going to best withstand this recession and we are very comfortable with the companies that we have in our portfolio and we think that they are trading at a significant discount with respect to their intrinsic value.

What can be the catalysts for the recovery of the technology sector?

At Franklin Templeton we believe that there are two important catalysts, one is that inflation is contained and the other is that companies are able to maintain their income. Regarding inflation, we are already seeing signs of leading indicators that mean that inflation in the short-medium term can be mitigated, that is, for example, inflation at 2 and 5 years is at levels of 2% that are very different from those 8% that we are seeing in inflation right now. We think that this is going to make monetary policy less and less restrictive and that will help companies listed on the stock market. And on the other hand, in a recessionary environment, if companies are able to maintain the level of income (and we are quite confident that technology companies will do so), it is the other catalyst that we see for a market recovery.

Having the headquarters of Franklin Templeton in Silicon Valley, as a company you have the opportunity to see new ideas and innovative trends, where do you think we will see the main innovation in the next few years?

Being in Silicon Valley is allowing us to see that what lies ahead in this digital transformation is a multi-decade, multi-million dollar investment opportunity. In the end, what we are seeing is that thanks to technology, companies are going to be much more capable of identifying the needs of customers and the products they like, and also on the production side, they are going to be much more capable of produce custom things for these customers. And this not only happens in technology companies but in all kinds of sectors. The 5G business, in the cloud business, in the artificial intelligence business, data analysis… are the trends where we see opportunities for the future.

What makes Franklin Technology unique?

We think Franklin Technology is a unique fund for three reasons. The first is experience; At Franklin Templeton, we have invested more than 60 years in innovation and technology. The fund arrived in Spain more than 20 years ago and the results of the last decade have been very good with an average annualized return of two digits. On the other hand, the team is one of the most experienced in the sector with an average of 18 years of investment experience. In addition, being in Silicon Valley gives us very good access to information, in fact we not only invest in listed companies but also have a small part of the portfolio in unlisted companies that give us a lot of intelligence to know what is coming in the future. Finally, we are a company that invests for the long term, an example of this is that the 20 most important companies that we have in our portfolio have been for more than 6 years, and this gives us a significant competitive advantage over other investors who They look more for the short term. For all these reasons, we think that this fund is very well positioned to benefit from this trend towards digitization.