We look at some potentially exciting technology themes outside of the AI realm and share ways for investors to get some exposure without the hefty price tag…by Josef Licsauer

Artificial intelligence (AI) dominated our headlines over 2023 spearheaded by the significant increases in demand for its technology. Companies such as Nvidia showcased astronomical increases in revenues and earnings, buoyed by its affiliation with AI, which led to its share price tripling over the year. While the outlook for AI remains positive, companies benefiting from the surge in demand have naturally become more expensive, which got us thinking. Are there other pockets of technology that have been overshadowed by AI or have been overlooked by investors and are now sitting at much more reasonable valuations?

Warren Buffet famously said that he doesn’t look to jump over seven-foot bars; instead, he looks around for one-foot bars that he can step over. Essentially, he likes to keep things simple. This is a mantra that’s served many well, but we at Kepler prefer a challenge. Instead of sticking with the easy conclusion that AI’s presence in almost every sector means it could do well again this year, we explore the exciting potential held in three themes that investors may be overlooking, which could offer interesting opportunities without the AI-related hefty price tag.

Chip off the old block

The temptation to use ‘chips’ to draw readers in with optimism that the following sentences would relate to an all-time favourite snack was strong. But on this occasion, we must disappoint, largely because a colleague recently wrote a brilliant article on microchips being fuelled by the widescale potential of generative AI and used the homonym already – Extra chips with that, please. Admiration for the title aside, the world of semiconductors is a fascinating one, with or without AI and over the years the industry has made monstrous progress, though there have been periods of struggle.

Overall, demand for semiconductors dropped in 2023, with sales falling 9.4%, according to the World Semiconductor Trade Statistics (WSTS). At first, this may be somewhat surprising, given a number of the semiconductor giants, like TSMC, Nvidia, and ASML saw growth in earnings and jumps in share price over the year buoyed by AI. However, looking underneath the bonnet we can see that AI is still only a relatively small part of the semiconductor market. According to McKinsey, a global management consultant, AI will account for just under 20% of semiconductor demand by 2025, so it’s unlikely to be the sole driver of the entire industry.

AI impact aside, wider industry pressures, amplified by China’s lacklustre economic recovery and subsequent fall in demand it had for semiconductors, as well as geopolitical tensions, and shifting consumer demands, more accurately reflect the reasons for the fall in sales. Oversupply was also a heavy burden. During lockdowns, the demand for certain technology, including that which allowed us to work from home, run businesses online, and keep tabs on our health digitally, soared. Lockdowns caused bottlenecks in micro-chip supplies leading to industry imbalances, which, when economies opened back up, reversed. New supply came to the fold just as demand slowed which then led to a significant build-up in inventory and depressed earnings for semiconductor companies.

However, there are a number of fund managers we’ve spoken to over the last year who believe earnings should recover as the sector bottoms out, demand returns, inventory build-ups reduce, and end markets stabilise, meaning the semiconductor industry looks an attractive investment. One of those managers is Richard Sennitt who manages Schroder Oriental Income (SOI). At present, he has an overweight position in technology, with a particular focus on semiconductors, as we discussed in a recent note. He believes they have temporarily depressed earnings due to inventory destocking issues and thinks there is an opportunity for earnings to recover next year as the sector bottoms out and begins to have a cyclical upswing. This would have a positive impact on share prices and company fundamentals.

Another manager who believes that there are plenty of opportunities in the semiconductor space is Mike Seidenberg, who runs Allianz Technology (ATT). At present, he invests roughly 30% in semiconductor/semi-equipment, which is overweight versus the index. While he has exposure to some giant cap semiconductor stocks, like TSMC and Samsung, he prefers to invest in the large and mid-cap stocks given the greater potential for growth. This includes companies such as Monolithic Power Systems, which designs and develops semiconductor-based power solutions, Lam Research, which focusses on semiconductor processing equipment used in the fabrication of integrated circuits, and lastly Micron Technology, a producer of memory and storage technology. Despite the rally in US tech stocks over the past year or so, ATT still trades on a 14.5% discount, which presents investors with a potentially attractive entry point for exposure to the semiconductor market. We will be publishing an updated note in the coming weeks.

Memory is also an interesting sub-sector of the semiconductor market that could be worth exploring. It was hit particularly hard over 2023, due to the demand and supply imbalance, and revenues fell around 37%. Demand for smartphones, PCs, and servers, its three largest segments saw much weaker demand than expected. However, WSTS predicts that the memory market, despite the pressures it has faced, could be set to drive a lot of the semiconductor market growth this year. This is because its being fuelled by the proliferation of connected devices and increased adoption of memory products across various industries, including automotives and industrials. It will also start to benefit from end markets stabilising, particularly given the expectations around demand resilience from the US market and the long-awaited economic recovery in China.

Fidelity Emerging Markets Limited (FEML) might be another good way for investors to gain exposure to the semiconductor theme. That’s because FEML invests in Samsung Electronics, which is one of the largest memory plays in the sector and also SK Hynix, which manufactures and distributes memory chips for a range of applications. Furthermore, its largest long book holding is Taiwan Semiconductor, more commonly known as TSMC, totalling a 10.4% net position. This could be viewed as a much cheaper alternative to Nvidia, using price to earnings (P/E) as a measure of valuation. TSMC is sitting at a P/E of 25x versus 95x for Nvidia, but as Nvidia outsources some of its manufacturing to TSMC, it’s still able to benefit from the uptick in demand. These companies were strong contributors to performance over the last year, something we discussed in our recent note.

Industries like this will undoubtedly face periods of volatility. However, it’s important to look at the crucial role semiconductors play economically, as the industry’s resilience and capacity for innovation remain critical drivers of its success, and while short-term challenges persist, the long-term could be steered towards unprecedented growth and opportunities for investors.

Do we even have the energy for this?

We are currently in an environment where a plethora of political goals are being agreed upon to aid in our quest to achieve more efficient usages of energy. These goals come in the form of targets laid out in the Conference of the Parties (COP) discussions, for example, where large-scale plans for clean energy as well as the transition away from non-renewable energy sources are detailed. And therein lies the opportunity, in our view. With the energy industry receiving such attention, buoyed by mounting pressures for governments and economies around the world to hit targets, support is in abundance. Therefore, a potential technological theme within energy to get excited about is battery storage.

This theme may come as a surprise to some of our readers given the recent news from two investment trusts in these areas – Harmony Energy Income (HEIT) and Gresham House Energy Storage (GRID). HEIT’s announcement that it was cancelling its fourth-quarter dividend, due to the weak revenue environment for batteries in the UK. The board stated that it would use asset sales and a restructuring of debt to stabilise things, with any proceeds from the asset sales first to reduce its gearing and then fund future dividends. GRID is in a similar boat as it invests in utility-scale-battery energy storage systems (BESS) which have felt the sharp pain of recent declines in gas prices, a disappointing start to the Energy System Operator’s (ESO’s) new energy trading platform and systemic delays connecting completed projects to the national grid. All have raised concerns about the revenue-generating capacity of the BESS sector which led to GRID suspending its fourth-quarter dividend as well as the challenge it faced in generating the cash required to cover the dividend this year.

Clearly, the outlook is concerning, and both trust’s discounts have ballooned given the uncertainty around the dividend. However, we must remember that the types of assets HEIT and GRID invest in are not one-hit wonders. They have the potential to play a vital role in our economy for decades to come, which, as we noted above, comes from the overwhelming support and funding from governments globally to hit clean energy targets. GRID’s board argue that the longer-term prospects of the BESS industry remain positive, evidencing conviction through a ‘limited’ share buyback programme. From that angle, some patient long-term investors could see the ballooning discounts as an interesting buying opportunity.

Despite the industry pressures, though, not all trusts have been hit as hard. Gore Street Energy Storage (GSF), which is currently sitting at a narrower discount versus HEIT and GRID, seems to have bucked the trend. It has reaffirmed its dividend target of 7% of NAV for the fiscal year and while it noted that there is clearly turbulence in the market, its healthy balance sheet, coupled with low debt, and geographical diversification outside of the UK, namely strong performance in the US and Irish markets, has partially offset the issues in the UK market. This is another option for investors looking to gain exposure to the energy market, without purely relying on UK assets. For things in the sector to improve, UK revenues first need to stabilise and the boards from each of the trusts above are confident this will happen in time. A good start to stabilising the revenues will come from the ESO resolving the teething problems with its new energy trading platform and the pressure relieved on the sector from anticipated rate cuts for 2024.

As we highlight in the table below, discounts are wide. All three of the trusts pose current discounts that are much wider than their own five-year averages as well as compared to the renewable energy infrastructure sector. If things stabilise in the UK, we think discounts could narrow, particularly in the case of GRID and HEIT, which are heavily invested in UK projects. Overall, this could present investors with an interesting buy-in opportunity, given the long-term application of these types of investments and the significant support showcased by governments globally. That said, the recent dividend announcements are not to be overlooked and the issues with battery revenues in the UK market could persist. This could mean that discounts widen further, dividend suspensions or cuts continue, and assets may be sold using the proceeds to help manage things like gearing or debt levels.




Harmony Energy Income (HEIT) 65.16 8.28
Gresham House Energy Storage (GRID) 66.23 4.63
Gore Street Energy Storage (GSF) 36.11 0.33
Morningstar Investment Trust Renewable Energy Infrastructure 22.56 4.47

Source: Morningstar, as at 06/02/2024

Driving down electric avenue

Electric vehicles (EVs) have sparked in popularity over the last few years, put forward as a way to help the world achieve its ambitious targets around lowering emissions and transitioning to clean energy. At the most recent COP28 gathering, the UK government gave the industry a demonstration of support by setting a target to install 300,000 public charging points by 2030. However, after witnessing a colossal year for growing EV sales in 2022, showcasing an increase of roughly 55% from the year prior, the industry was struck with a sharp pain in its side in 2023. Global growth sales increased by 31%, a fair deviation from the growth recorded in 2022. This was driven largely by a global slowdown in demand for EVs. That said, we think given the large-scale support and funding for the industry, recent pressures may have unlocked some opportunities in the sector that investors can take advantage of.

Before we treat our readers with some suggestions around exposure to the world of EVs, let’s paint the picture behind the global slowdown. There are a number of reasons, so bear with us. Macroeconomic challenges have added pressure to the industry as higher interest rates dampen consumer appetite for EV financing. Rising costs for EVs have also been a key bottleneck for the end markets, as they remain far more expensive than internal combustion engine vehicles, especially in Europe and North America. Another issue is that investment in capacity and technology development has outrun actual EV demand, boosting pressure on companies to cut costs and in some cases halt production. This essentially means the market is over-supplied vs demand, which has also had a knock-on effect on suppliers, who are now having to cut capital spending and jobs. Furthermore, China, the world’s biggest EV market, showcased an astonishingly weak economic bounce back following the lifting of its zero COVID policy, which sapped demand across the entire EV pipeline.

Given the above, it’s not hard to piece together why a slowdown has occurred. However, we think this kind of industry pressure could open the doors to opportunities in the market. This includes the falling cost of batteries, which in our view is going to play a key role in 2024. Lithium, a major component for advanced batteries, saw its price plummet 80% over 12 months, to 18/12/23. While this has put pressure on mining companies, it’s significantly reduced the cost of batteries, which could, in time, drastically improve vehicle margins. The first hurdle to jump is inventory. Similar to our discussions above, there has been a build-up in stock, given the imbalance of supply and demand for certain products. Until inventory issues subside, company margins won’t improve materially.

However, the managers running Impax Environmental Markets (IEM), have started to see signs that the inventory destocking issues are easing for electrical components, which is translating into more supportive corporate earnings. They also argue that the emergence of the Asian EV ecosystem holds a lot of merit, largely down to the dominance of lithium-ion battery production in Asia and the fact that China, over the past two decades, has become the world’s largest EV market. They argue that when China fully unleashes its economic recovery potential, the demand for stock will be strong. Being able to count on cheaper inputs means nations, particularly the developing ones, can potentially sell EVs at lower prices, thus supplanting internal combustion engines. IEM have invested in a company called Shenzhen Inovance Technology to expose themselves to this potential uplift. It’s a leading domestic supplier of critical components such as servo motors, low voltage invertors and SCARA robots and has rapidly growing EV and rail businesses.

Another angle is investment trusts offering exposure to the physical raw materials that make up batteries. Alongside the drop in lithium prices, we also saw a sizeable drop in the likes of nickel and cobalt which fell about 30% in 2023. BlackRock World Mining (BRWM) is a direct beneficiary of the ever-increasing demand for metals and has a small allocation to cobalt via its holding in Glencore and exposure to nickel through Vale, a diversified mining group. The managers have long been cognisant of the huge demand for metals that a green economy will produce and have naturally built up exposure here. Through two of the trust’s unlisted investments Oz Minerals, a copper producer, and Jetti Resources, a copper leaching company, they can also benefit from the fluctuating prices and demand for copper. In the case of lithium, they offer exposure through Albemarle, a speciality chemical manufacturer, and Mineral Resources, a mining company.

Another interesting way to benefit from lower costs and more efficient battery tech is through Scottish Mortgage (SMT). SMT invest in a range of companies across the EV sphere, including ChargePoint, an electric vehicle charging solutions company, and Northvolt, which is a battery developer and manufacturer specialising in lithium-ion technology for EVs. Tesla is another beneficiary in the portfolio. It is a big user of these batteries but also a player that looks to enhance battery efficiency, by blending lithium with other materials such as nickel and iron phosphate. The manager acknowledges it has faced headwinds from higher interest rates but believes that EVs continue to gain share and Tesla, as the market leader, has the scale and profitability to invest and grow in challenging conditions.


Overall, it’s very clear to see that AI isn’t the only technology story in town. It certainly has a place and will be integral for the advancement and development of many sectors worldwide. Having said that, its recent run of performance has led to a number of AI-related stocks becoming quite expensive. Therefore, we’ve explored three potential themes, in industries that have been under pressure more recently, that may offer investors alternative ways to access exciting pockets of technology without the hefty price tag that comes with AI. It’s worth remembering, though, that diversification is key, so we’d argue that investors should ensure that they have a portfolio that features a mix of investment styles and a range of geographical and sector coverage.
investment trusts income


This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

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