Fidelity: Global Technology: Overdone risks and diverse opportunities

How has the portfolio performed against a volatile technology backdrop?

Technology stocks have entered 2026 with notable turbulence. While the MSCI World Technology Index is broadly flat year-to-date, this headline masks a meaningful rise in underlying volatility. At the macroeconomic level, uncertainty around potential monetary policy shift under the new Federal Reserve leadership has weighed on valuations, particularly for long-duration growth assets such as technology stocks.

Within the technology sector, AI has continued to dominate the narrative. Big tech companies have announced substantial increases in capital expenditure, raising questions about return on investment and the sustainability of spending levels. At the same time, concerns are growing around AI-driven disruption within parts of the software ecosystem. Earnings season has added another layer of volatility. Some companies entered the reporting period with elevated expectations, and disappointments led to sharp post-earnings downgrades.

Against this volatile backdrop, portfolio performance to the end of January was positive. Our overweight positions in European semiconductor equipment and analogue semiconductor names have contributed meaningfully to relative performance. Among the mega-caps, our overweight holding in Alphabet and underweight exposure to Apple and Microsoft also supported returns. On the other hand, underweight exposure to certain AI semiconductor names and holdings in application software were detractors. Overall, the positives outweigh the negatives in the early part of the year.

Standard period returns net of fees, EUR (%)

12-month rolling returns net of fees, EUR (%)

Past performance is not a reliable indicator of future results. Returns may be affected by changes in currency exchange rates.
Source: Fidelity International, 31 January 2026. Performance is for Fidelity Funds - Global Technology Y ACC EUR. Basis nav-nav (excluding any initial sales charge), net of fees in EUR, with gross income reinvested. Comparative Index: MSCI ACWI Information Technology Index (N). *Hyun Ho Sohn was appointed portfolio manager on 31 March 2013. Performance is annualised.

Software companies: Are the AI risks overdone?

I believe the current market narrative has become overly negative on incumbent software companies, and in many cases the blanket sell-off looks overdone. The prevailing view is that AI is increasingly capable of generating software code, creating disruption for software providers.

While the risk cannot be dismissed, our due diligence suggests the pace of disruption is unlikely to be as immediate or as universal as current valuations imply. We have spent considerable time speaking with company management teams, industry experts and internal IT practitioners. Our takeaway is that incumbents retain meaningful structural advantages, and importantly, time to adapt.

Enterprise software applications underpin mission-critical business processes, which are deeply embedded and costly to replace. Additionally, enterprise adoption cycles are fundamentally different from consumer AI adoption, which means that change tends to be gradual, rather than the abrupt adoption seen in consumer spaces. Incumbents therefore have time to respond and evolve their offerings.

Furthermore, leading software vendors often possess significant proprietary data. This data is critical for training and fine-tuning AI models in a way that delivers tangible enterprise value, positioning incumbents to enhance their products and benefit from AI, rather than be displaced by it.

Software creation is also only one part of the value chain. Successful deployment requires integration into complex workflows, ongoing management, security, governance and regulatory compliance. These are areas where established vendors have deep expertise, long-standing customer relationships and strong go-to-market capabilities. Enterprise software is not plug and play, and those execution capabilities create meaningful barriers to disruption.

It is also important to recognise the current limitations of AI. Generative AI models predict likely outcomes rather than operate with deterministic precision. Hallucinations and reliability issues remain real challenges, particularly in mission-critical enterprise settings. This further reinforces the idea that the full-scale displacement of established systems is unlikely to happen overnight.

Identifying long-term software winners

From an investment perspective, the key is to not treat software as a homogeneous category. The opportunity lies in carefully distinguishing between long-term winners and structurally challenged businesses.

For example, portfolio holding Salesforce retains a preferred position in enterprise software. It is deeply embedded in customers’ workflows, benefiting from rich access to enterprise data and metadata, established integration layers, and proven security and governance capabilities. Intuit is also a preferred holding as a one-stop software platform for small and medium-sized businesses (SMBs). Many SMBs rely on consolidated technology stacks and favour full-service providers rather than do-it-yourself solutions - particularly for essential functions such as tax compliance, accounting and finance.

Within IT services, portfolio holding Accenture is well-positioned to play a critical role in helping enterprises integrate AI into their business processes. Beyond strategy and implementation, the ongoing management of AI-driven systems including governance, security and optimisation, will become increasingly important. This is an area where Accenture’s scale, client relationships and execution capabilities provide a structural advantage.

Opportunities in fintech and digital content

One area we favour is fintech and payment service providers. These are innovative companies with technological advantages that are scaling globally, often at the expense of incumbent financial institutions that are struggling to defend large profit pools built on legacy systems. Leading payment platforms such as Adyen and cross-border money transfer providers such as Wise are good examples. They combine structural growth, strong execution and an expanding addressable market.

We have also been adding selectively to digital content owners and distributors across video, music and gaming. These businesses benefit from favourable demographic trends, strong network effects and in many cases, significant monetisation headroom through price increases and advertising.

Widespread innovation in China

We also continue to see attractive long-term opportunities in China's technology sector. Innovation is progressing rapidly across areas including semiconductors, electronic components, electric vehicles and batteries, industrial automation, robotics and AI. The breadth of development is notable and, in many areas, Chinese companies are moving up the value chain at speed. While many companies are currently under-earning due to cyclical oversupply and intense domestic competition, longer-term structural dynamics remain positive. As such, selectivity and research-backed analysis remains crucial in this space.

Chinese technology companies are increasingly competitive on cost, engineering capability and speed of execution. Over time, we expect them to play a larger role in the global market. As Chinese firms gain international market share, the broader domestic technology value chain should benefit, particularly through localisation and local sourcing trends.

In terms of specific sectors across China, we see opportunities in leading consumer internet platforms with strong domestic market positions, as well as companies gaining global share in segments such as online travel, video gaming and home appliances. In addition, analogue semiconductor and application software companies are also positioned to benefit from the ongoing localisation drive.

Key trends from earnings season

Turning to the recent earnings season, among large-caps, we saw strong growth in both digital advertising and cloud computing, while robust customer demand supported better than expected results. Substantial capex increases from companies such as Alphabet, Amazon and Meta are flowing through to hardware and electronic component suppliers across the AI value chain, where companies reported particularly strong numbers.

We also saw signs of cyclical improvement in analogue semiconductor companies with exposure to broad-based industrial demand, as orders picked up following an extended period of inventory digestion. In traditional IT services, demand appears to be stabilising despite earlier concerns around AI-driven deflation, and the company commentary was generally more balanced. Overall, earnings have been constructive, with the strengthened AI-related segment complemented by early signs of cyclical recovery in other parts of the technology sector.

Outlook for the remainder of 2026

Looking ahead, we are becoming increasingly cautious on the AI capex theme that is currently driving much of the technology sector, following the recent large capex announcements from major technology companies. We are seeing signs of cyclical over earning in parts of the ecosystem, stretched valuations and very optimistic market sentiment.

However, we continue to see attractive opportunities where long-term potential is being underestimated. Hyperscale cloud businesses remain core long-term holdings. As mentioned earlier, we also believe concerns around AI-driven disruption in software and IT services are overdone, and we see selective opportunities in these areas.

Overall, we expect market leadership within technology to broaden out over time. While the current narrative is heavily focused on AI winners and losers, the sector is much more diverse. There are compelling opportunities beyond the AI theme, including digital content creation and distribution, as well as payments and fintech. Ultimately, technology remains an incredibly diverse sector, and that diversity continues to provide a wide range of attractive investment opportunities.

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