The technology business cycle’s recovery could be slower than expected due to macro-environmental conditions slowing IT spending, such as a pull-forward in demand during COVID. The sector has experienced a decline in demand over the past year, leading to a build-up of excess inventory. While certain parts of the sector, such as PCs, show early signs of bottoming, semiconductor lead times remain elevated, signaling continued supply chain constraints. Management teams have implemented conservative financial policies with slowing mergers and acquisitions and reduced share repurchases. Given the bifurcation of the technology sector, high-quality issuers and defensive BBBs are preferred. More cyclical BBBs have outperformed their lower-beta peers since mid-2022 and no longer provide adequate compensation for potential macro or idiosyncratic risks. Neuberger Berman manages a range of investment strategies globally, including equity, fixed income, quantitative and multi-asset class, private equity, and hedge funds, on behalf of institutions, advisors, and individual investors, and is committed to delivering compelling investment results for clients over the long term.
IG Technology: Navigating the Technology Business Cycle
According to recent reports, the technology business cycle may experience a slower-than-expected recovery. However, despite short-term uncertainties, experts remain optimistic about the long-term outlook.
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The Technology Business Cycle Could Have a Slow Recovery, but Long-Term Outlook Remains Positive
The technology sector has experienced softening demand in the past 6-12 months, leading to uncertainty about its recovery. However, long-term growth drivers such as shifts to the cloud, digitalization, and artificial intelligence still support a constructive view of the industry.
The weakening demand is attributed to the deteriorating macroeconomic environment that has slowed IT spending, exacerbated by the pull-forward in demand that happened during COVID-19 as work-from-home trends accelerated enterprise and consumer IT spending. For example, consumer spending on PCs increased by 45% in 2021 compared to 2019. These higher demands were eventually confronted with constrained supply chains due to lockdowns, leading to longer lead times for chip components.
While some parts of the IT sector, such as PCs, show early signs of bottoming, other segments are not there yet. Semiconductor lead times, for example, remain elevated at 23 weeks, signaling that supply chains are still constrained. As supply constraints ease and demand weakens, excess inventories pile up on company balance sheets, at distributors, and at customers, pressuring company earnings.
Given the uncertainty, we intend to manage our exposure to the sector more defensively in the near term, but will look to add risk as opportunities present themselves. For example, as inventory builds up in markets such as autos due to the unwinding of semiconductor lead times, there could be a pullback in performance, albeit to a lesser extent than other segments because of secular growth drivers including the EV transition.
Overall, while the technology business cycle could have a slower-than-expected recovery, long-term secular growth drivers still support a positive outlook for the industry.
Credit Metrics in Technology Sector Normalize, but Risk Remains
The technology sector has undergone a pull-forward in spending over the past year, which has led to the normalization of credit metrics, according to Neuberger Berman. While the sector is not immune to risks, the rating downgrades and fallen angels could be relatively muted due to conservative financial policies of management teams, which have included slowing mergers and acquisitions and reducing share repurchases.
However, there is a bifurcation of the investment grade technology sector, consisting of large high-quality issuers and higher-beta BBB companies. The firm recommends investing in high-quality issuers and defensive BBBs, as more cyclical BBBs no longer compensate investors for potential macro or idiosyncratic risks.
Defensive Approach in Near Term
Neuberger Berman intends to manage its exposure to the technology sector more defensively in the near term. The firm believes that certain parts of the IT sector, such as PCs, are showing early signs of bottoming, but the pace of recovery is uncertain, while other segments are not there yet. Semiconductor lead times remain elevated at 23 weeks, which signals that supply chains are still constrained.
The firm will look to add risk as opportunities present themselves. However, investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors.
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. The firm, its employees and advisory accounts may hold positions of any companies discussed.
Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
Source: (1) Bureau of Economic Analysis; (2) Susquehanna
Note: This material is being issued on a limited basis through various global subsidiaries and affiliates of Neuberger Berman Group LLC. Please visit www.nb.com/disclosure-global-communications for the specific entities and jurisdictional limitations and restrictions.
The “Neuberger Berman” name and logo are registered service marks of Neuberger Berman Group LLC. This article, titled “IG Technology: Working Through the Cycle,” was written by Neuberger Berman, an independent investment manager that provides equity, fixed income, quantitative and multi-asset class, private equity and hedge fund strategies globally. Founded in 1939, the firm has a team of more than 2,100 professionals with offices in 23 countries. Neuberger Berman has been named first or second in Pensions & Investments Best Places to Work in Money Management survey for five consecutive years, among companies with 1,000 employees or more. The firm manages $323 billion in client assets as of March 31, 2019. For more information, please visit the Neuberger Berman website.
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