Record high employment means that businesses are turning to automation – Merryn Somerset Webb asks Walter Price of the Allianz Technology Trust about the best ways to invest.
Horrible news for British strawberry lovers, says The Guardian: this year’s crop – which has started to ripen two weeks early, thanks to the good spring weather – may end up rotting on the ground. Why? A shortage of fruit-pickers. Growers across Europe are “competing for labour”. Demand is high everywhere (hence better deals on pay, bonuses and accommodation), but supply is falling fast: wages in Romania (where most EU fruit-pickers come from) have risen such that workers no longer make six times the local rate abroad, but more like three-and-a-half times. That rather changes the incentive – and the supply of strawberries.
Or so the story goes. But if the worriers were to look a little deeper into it, they might find that the picking panic is overdone. Enter Fieldwork Robotics, a spinout from the University of Plymouth, that has developed a fruit-picking robot (a “mechanical arm and hand that runs on wheels”, says The Times), which will apparently be able to pick 25,000 berries a day. Exciting stuff. But no surprise, I suspect, to Walter Price, manager of Allianz Technology Trust (LSE: ATT). Nothing, he says, drives spending on new technology more than a shortage of labour. Between 1948 and 1967, tech spending leapt from around 0.5% of US GDP to 1.5%. Between 1991 and 1999, it went from 2.9% to 4.7%. Now, as another shortage begins, it is rising again. It is currently at around 3.5%, says Price, and is forecast (by Fundstrat) to rise to 5.5% by 2050 as firms rush to invest in labour-replacing automation (Fundstrat suggests the US will see a shortfall of 8.2 million workers over the next decade alone).
Follow this logic and it makes sense that tech stocks should outperform in periods of labour shortage (as everyone rushes to buy their products), while firms that are “heavily reliant on labour to add value” lose out. Conveniently, that is exactly what the data shows. When we met last week, Price produced a series of charts showing that in past periods of labour shortage, tech stocks trounced consumer staples (see example below).
The same is true of the (so far short) period since the labour market started tightening in the US in 2015. If the past repeats, tech stocks should outperform for another couple of decades at least.
Which tech stocks will do best?
This hypothesis fits neatly with many of the themes we have been discussing in MoneyWeek for years. We have, for example, argued that cheap and tax credit-subsidised labour lies at the heart of our productivity problem: after all, if workers are so cheap that you can hire as many as you like without denting your margins, why invest in new technology that (in the short term) will? Quite. So what kind of tech stocks does Price have in mind? Right now, mostly mid-caps that can exploit areas of “innovative disruption”. He particularly likes cloud computing. We are, he says, at an “inflection point” where cost-sensitive firms and governments are favouring the cloud and “software as a service” over one-off product purchases.
Robotics and automation also feature heavily in his 50-70 stock portfolio, for the demographic reasons mentioned above, as well as a drive by Western governments to regain traction in manufacturing, and to remain competitive with emerging markets: Price and I agree that one effect of Donald Trump’s tariffs will be accelerated reshoring, for example. One stock to watch is Teradyne (Nasdaq: TER), says Price – it is valued as though it were just an automatic test-equipment maker, but it also makes robots for the defence industry as well as for warehousing and manufacturing, and should be valued as such.
Tech stocks – less expensive than they look?
So what of prices? We’ve written many times that we aren’t convinced the tech sector can hold at today’s prices, and the forward price/earnings (p/e) ratio of the trust of more than 30 times won’t look reasonable to anyone who judges value by p/e (see my interview with Lyrical Asset Management’s Andrew Wellington from three weeks ago). But Price thinks they aren’t unreasonable. Comparisons with the tech bubble of the late 1990s are silly, he says. Back then valuations were unsupported by earnings, cash flows, and the ability of firms to return those cash flows to investors. That’s not the case now: in this cycle, growth is supported by real earnings and real cash. In a low-growth world, it’s one of the few areas that is generating real growth by creating new markets and significantly changing old ones (the car market is being transformed by tech, for example).
The fund has a good record of outperformance (up 550% since 2007, beating the index by 180%); isn’t too expensive (although it does have a performance fee attached to it); and is run in the kind of high-conviction way we approve of (the active share is around 85%, so it is far from being a closet index tracker). If you want to be in the US tech sector (84% of the portfolio), but can’t quite cope with too much of the FANGS, it is worth a look.