Tips for investing in the technology environment

Given the current scenario, investors are confronted with the dilemma of how much risk they are willing to take. A possible recession could be indicative of a worse performance of cyclical sectors, despite their low valuations. Conversely, a further increase in inflation would significantly hurt growth stocks.

Against this context, let us try to find clues for investment...

First idea the US software industry.

Since the start of 2022 the software industry in the US has entered a phase of successive buyouts from private equity funds. Private equity funds have historically focused a large part of their investments on the software industry, given its unique characteristics 1 addressable markets with strong growth and high visibility (the waves of investment linked to digitalisation public cloud or cyber security are only in their infancy) 2 business models increasingly based on recurring sales (given the sector's migration from a licence /maintenance model to a subscription model also known as Software as a Service) 3 free cash flow generation much higher than that of the market as a result of high operating margins and relatively low investments.

Furthermore, it should be noted that valuations are currently more attractive. The US software sector is worth around 9 6 x sales (compared to a 9 5 x sales average over the past 5 years and 17 2 x sales at the sector peak in 2021 according to Morgan Stanley).

Finally, with the expected slowdown in growth, the largest software companies will boost their future growth by buying other companies that will provide them with entry points to one or more high growth markets, or even access to certain technologies. The most attractive segments are expected to remain Cyber Security, Devops Analytics, Observability, ITSM (IT Service Management), ITOM (IT Operations Management), and Collaboration Software. 

Second idea: US biotech companies, especially those equipped with innovative, digital development platforms

The average development time of a drug over all its cycles is 8 years The pharmaceutical industry has therefore always been structured around long cycles and returns on capital employed limited by low success rates in the development phases As we have seen during the Covid crisis and the extremely rapid developments in mRNA vaccines, recent advances in Artificial Intelligence (and MachineLearning ( will take this industry to the next level.

Three types of benefits of AI/ML can already be identified:

1. identification of innovative therapies

2. reduction in drug development time

3. higher probability of success for molecules in clinical trials

For example, Machine Learning algorithms will bring major benefits in defining the right dosage of a tested molecule to reach the optimum "efficacy vs toxicity" ratio and in the constitution of patient cohorts that meet the desired characteristics (phenotypes and genotypes) for clinical trials. These innovative therapeutic approaches open up prospects for a cure that were unthinkable a few years ago At current prices, some valuations have been divided by 3 or more and offer attractive entry points

To wrap things up, we are maintaining a cautious equity allocation, remaining short duration and further reducing our active weight against the benchmark. As you can see, the next earnings cycle is likely to be less favourable for some sectors or themes, but not for all.