Polar Capital Technology Trust Plc – Unaudited Interim Results

In accordance with stated policy, no interim dividend has been declared for the period ended 31 October 2017 or the periods ended 31 October 2016 and 30 April 2017 and there is no intention to declare a dividend for the year ending 30 April 2018.

Market Outlook

Ten years after the financial crisis begun, global growth is finally beginning to reaccelerate with world GDP pegged at 3.6% and 3.7% for 2017 and 2018 (2016: 3.2%). These forecasts represent modest upside (c.0.1%) to where expectations stood at our fiscal year end. Advanced economies are now expected to grow 2.2% this year (2016: 1.7%) with better growth in Europe more than offsetting modest downward revisions to US forecasts due to the absence of fiscal stimulus from anticipated tax cuts and the impact of Hurricane Harvey. While upside associated with the new President may not have arrived on cue, US growth should remain at healthy levels (2.3% in 2018) due to supportive financial conditions, robust consumer confidence and unemployment at 17-year lows. In contrast, the Euro area has surprised to the upside with Q3 GDP +2.5% y/y and unemployment falling to 8.9% in September, the lowest level since the start of 2009. Although European growth is expected to moderate next year to c. 1.9%, it is likely to continue outpacing the UK where consumption has been negatively impacted by Sterling weakness and uncertainty associated with Brexit. True to form, Japan has benefitted from strengthening global demand and supportive fiscal policy, although growth is expected to slow to <1% in 2018 as monetary stimulus is scaled back. Emerging markets have also strengthened, driven by China and higher commodity prices with 4.9% growth expected next year.

Despite this modest reacceleration, global growth remains at levels seemingly insufficient to spoil the current 'Goldilocks' investment backdrop with growth 'just about right' – enough to keep earnings estimates ticking higher, but not too much to accelerate the pace of rate tightening. While the number of Americans collecting unemployment benefits recently fell to the lowest level since Richard Nixon was president, labour market improvement has had limited impact on core inflation and “slow transmission into faster wage growth” in advanced economies. As we have previously suggested, persistently soft wage growth suggests that the labour market is less robust than headline employment data might indicate and our belief that technology and globalisation have forever changed the labour/capital relationship. As such, while a number of central banks are beginning to roll back earlier monetary stimulus programmes, we expect monetary policy to remain both accommodative and somewhat data dependent. This gradualist view was recently supported by the nomination of Jay Powell to the position of Federal Reserve chair – a centrist said to agree with Janet Yellen's dovish approach to interest rates and unwinding of the Fed's balance sheet. Likewise, the recent interest rate hike by the Bank of England (BoE) – its first in more than a decade – was accompanied by notably dovish commentary, with MPC minutes indicating that “further increases will be limited”. Absent an inflation shock we expect policymakers to continue to tread carefully on the path of normalisation, reflecting a recovery that, while broadening, remains shallow.

While equity markets have enjoyed a strong first half, we remain hopeful that they can add to their gains during the remainder of our financial year. Equity valuations are little changed during this fiscal year, the forward PE on the S&P 500 trading at 18.0x today, up from 17.9x. This continues to compare unfavourably to five and ten-year averages of 15.7x and 14.1x respectively. However, we remain unconvinced by the relevance of longer-term averages that fail to capture the uniqueness of the current investment backdrop, with accommodative policy and the prevailing rate of inflation supportive of current equity valuations. However, with most traditional measures above long-term averages, equities are likely to become increasingly dependent on underlying earnings growth which in the US was c. 6.2% y/y during Q3. While its passage has been delayed, potential tax reform could add substantially to future earnings growth should a new 20% rate prevail. As previously, stocks appear more attractive than either cash or bonds, with the Fed Model (which compares equity and bond yields) suggesting equities remain undervalued. US stocks remain awash with cash with c. $2.3tr of liquid assets held by non-financials companies (+60% since mid 2009), which should provide ongoing support for equities via buybacks and M&A. That said, lowmarket volatility and the lack of tax reform / offshore cash repatriation has resulted in less buybacks (-6% y/y in Q2) and fewer M&A transactions during 2017. It is also worth noting that much of the excess cash is held (largely overseas) by technology companies such as Apple, Microsoft, Alphabet and Cisco while overall debt issuance has also risen 66% over the past five years.