March 2023


The Good: Cyber Packs A Punch

Our cyber holdings reported strong numbers this earnings season, which suggests that these companies continue to execute within an increasingly challenging macro environment. Relative to consensus analyst estimates, revenue generally came in-line and there were big beats on profitability.


Source: High Street, Bloomberg

Zscaler’s share price sank on the back of a billings figure that was “not the typical massive beat” that investors have become accustomed to, as the tough macro has brought about increased budget scrutiny and longer sales cycles. We believe that the investment thesis remains intact and retain our conviction in Zscaler as a high quality Zero Trust growth name, despite the near-term macro uncertainty. Fortinet and Palo Alto’s results were met with much analyst praise, as the companies not only delivered strong quarters topping expectations across most metrics, but also increased their 2023 guidance in what many feared would be a year characterised by slower spending in the cyber security sector.

Cyber security continues to be one of our highest conviction themes for the long term. It is estimated that the global cost of cyber-crime will reach an astounding $23.8 trillion by 2027. To put this into perspective, US GDP at that time is estimated to be around $30 trillion. The increase in digitalisation has made companies vulnerable to rapidly escalating levels of cyber-crime, with the average expense of a data breach in 2022 reaching $4.4 million. Upon considering these facts, it is evident that cyber security is no longer an optional expense for businesses.


The Bad: Banking Turmoil

There are few situations scarier than waking up to find that you cannot access the money in your bank account. It is this trepidation which drives bank runs. But what led to Silicon Valley Bank’s (SVB) epic collapse in February, and how will it affect the global economy going forward?

Source: Shutterstock

According to its website, SVB provided banking services to nearly half of America’s venture capital-backed technology and life-science companies. Over the last decade, the bank behaved as most banks do, keeping a fraction of deposits on hand in cash, and investing the remainder in long-term bonds. These bonds promised consistent, albeit relatively small, returns into the future. This promise held true in an environment of low interest rates, but in the last 12 months, unprecedented interest rate hikes, resulted in SVB earning a low, fixed return with depositors expecting to be paid a higher interest rate on their savings. Simultaneously, venture capital markets began to cool which meant SVB lacked the profitability to meet these expectations. What started as a trickle as the savvier depositors started to withdraw their deposits and invest it in money-market funds offering a market related yield, quickly led to concerns emerging around the financial health of SVB. This resulted in widespread fear around the safety of their deposits which customers started pulling at a rapid speed, and suddenly: the bank had a run on its hands.

Although SVB’s scenario was extreme, it did demonstrate the strain that the current interest rate environment is putting on the banking sector. Ordinary citizens have taken stock of what happened at SVB and in fear, have begun to pull deposits, and put these funds into higher yielding money-market funds. There is cause for concern here, as although financial contagion is unlikely and historically happens very infrequently, It snowballs rapidly as confidence in the banking system wanes.

Fiscal regulators have partially stepped up, insuring certain deposits and calming markets to a certain degree. But we have heard very little from the Fed. They are now between a rock and a hard place as they need to maintain interest rates at current levels to calm inflation while these very same measures risk destabilising the banking system, the financial bedrock of the economy. At the moment they have an extremely fine line to walk with markets currently pricing in an 8% chance of a rate hike at the June meeting. A few more bank runs may increase these odds materially and ironically, achieve their original task of taming rampant inflation.


& The Spring Cleaning

The spate of layoffs that began late last year isn’t showing signs of slowing, with 2023 marking the worst start to a year for employees since 2009. According to Bloomberg, executives across the world have sacked almost half a million workers since October last year.

The Tech industry has seen some of the biggest losses, accounting for about a third of the total cuts, as mass layoffs stunned many Silicon Valley workers, who had long enjoyed generous pay and cushy benefits. Although some fear what these retrenchments might mean for the outlook for the tech sector, they were probably overdue. Company leaders overhired as demand for their services surged during the pandemic, and in a sense, this reset is just a restoration of normality.


Source: Bloomberg

The layoffs have been remarkably concentrated, with almost half of the job cuts coming from just 25 companies. The tech titans dominate the top 10 list with the respective management teams promising a new era of austerity. Cuts at Amazon alone have wiped out more than 27,000 jobs since last October, however, on a proportional basis it is Meta Platforms (formerly Facebook) which truly stands out. Meta CEO, Mark Zuckerberg, has acted strongly on his intentions to cut costs by slashing over 24% of the company’s workforce, with 2023 being labelled as the “year of efficiency” for the company.

Investors have generally responded positively to these layoffs, with stocks rallying on the back of such announcements. Prominent examples include two of High Street’s holdings, Salesforce and Meta Platforms, which are up 44% and 69% for the year respectively.

In the long run, we believe the tech sector reset will be a net positive for our tech holdings. Economic downturns are natural and necessary for progress. During the good times, companies tend to get lax and waste money. Downturns, therefore, play an important role in forcing companies to focus more on efficiency and cost management. This will likely be good for the longer-term prospects of these companies as more efficient companies are ultimately more profitable.


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