The State of Global Technology Funding

The technology sector powered a rebound in global stock markets in 2023, amid ongoing geopolitical tensions, interest rate volatility and slowing economic growth.

Technology stocks were among the biggest drivers of global equity performance in 2023, as cooling inflation and a peak in interest rates brought investors back to growth stocks. The tech-heavy US Nasdaq added 44% in 2023, outpacing the 14% gain for the broader Dow Jones Industrial Average.

The FTSE All-World equity index finished the year up 23%, reversing an 18% plunge in 2022, and the same pattern was evident across major markets. In the US, the S&P500 index gained 24% in 2023, following a drop of 20% the year before. Australia’s S&P/ASX 200 rebounded 8% after a 5.5% drop in the previous year.

Japan was the standout among equity markets in Asia Pacific, gaining 28% in 2023 as a weaker currency and persistently low interest rates continued to draw investors to the market. The FTSE China, conversely, slid 9% on concerns of slowing growth.

Enthusiasm around AI was a major driver of outperformance for megacap US tech companies, seen as the best placed to commercialise the data-intensive technology. This has also increased the concentration of equity markets: the 10 biggest US stocks account for around 30% of the FTSE US index, and the same measure in Europe, Japan and emerging market benchmarks is at its highest for a decade.

The rebound in global equity markets has yet to be reflected in primary capital raising.

The slump in initial public offerings (IPOs) in 2022 continued in 2023, reflecting the persisting risk-off sentiment. Global IPO proceeds fell 33% to US$123.2 billion in 2023, according to EY. ¹ Despite high-profile technology listings from companies including ARM Holdings, Instacart and Klaviyo, the tech sector saw a decline in IPO numbers, valuations and after-market performance in 2023.

Start-up and early-stage firms have also struggled to raise capital in either equity or debt markets.

Global venture capital fundraising had hit US$117.3 billion for 2023 as of end-September, having totalled US$301.4 billion for full-year 2022, according to PitchBook data² . Similarly, global fundraising of US$180 million for venture debt strategies in the first half of 2023 was heavily down on US$6.5 billion the year before, show numbers from Private Debt Investor. ³

Venture and early-stage investors have grown more cautious and more likely to support existing portfolio assets than fund new ones, thanks to the less certain geopolitical and economic environment, slowing growth, and higher rates (and thus higher funding costs). The IMF’s baseline forecast is for global growth to slow from 3.5% in 2022 to 3.0% in 2023 and 2.9% in 2024. ⁴

The ongoing war in Ukraine and outbreak of conflict in Gaza in October have cooled investor confidence. And the collapse of Silicon Valley Bank (SVB), a big tech lender, in March 2023 further intensified the chill running through startup financing. HSBC acquired SVB’s UK business and rolled it into a new entity, HSBC Innovation Banking.

We are optimistic for technology funding in 2024 as a more conducive rates environment brings businesses and investors closer in valuations.

With global inflation steadily moving lower, many central banks could well start making rate cuts in the first half of 2024. Notably, US Federal Reserve chair Jerome Powell said in December 2023 that tightening of monetary policy was likely over – and 17 of 19 Federal Reserve policymakers expect to see lower rates by the end of 2024.

Lower rates will be a powerful catalyst for growth equities, and particularly for technology. Worries about China’s economy, which held back Asian equities in 2023, may fade if earnings growth remains strong.

"Slowing growth and a peak in policy rates should also favour growth relative to value and, in our view, will maintain the outperformance of mega-cap tech in the US, increasing market concentration further,” says Alastair Pinder, HSBC’s Head EM and Global Equity Strategist.

That said, there is still the potential for further shocks in 2024. Persistent inflation could keep rates higher for longer, creating a drag on equity valuations. Geopolitical uncertainty is also likely to remain elevated, especially with US elections coming up later this year.

Looking at equities in general, tech is one of our two core sector overweights, and we expect mega-cap tech names to continue to outperform, driven by a wave of innovation and monetisation around AI and automation.

We believe demand for software and services will remain robust, despite the weak economic outlook, as companies continue to invest in automation to reduce costs and support margins,” says Pinder.

In the private markets, money has been pouring into tech startups of late, led by the likes of San Francisco’s Anthropic and fellow Silicon Valley firm Inflection AI. That trend looks set to continue, given the potential applications of AI and automation in boosting productivity across multiple sectors.

Australia can ride the growth in this sector, given it has the ingredients to become a top 10 digital economy.

Tech is Australia’s third-largest industry, projected to account for 13% of GDP by 2030. The country is ranked sixth globally as a fintech hub, and ranks first among OECD countries for its capacity to attract and retain highly educated talent.

HSBC signalled its confidence in the growth of Australia’s tech sector in late 2023, setting aside an initial US$150 million (AU$228 million) of venture debt finance for late stage VC-backed Australian tech scaleups.⁵ Venture debt is set to become an increasingly appealing option, complementing growth equity.

Globally, the strength of investors’ enthusiasm around new technologies can support a broader rally in equity markets in 2024. As investors look beyond the top US megacaps, the global technology sector is well placed to benefit from a rebound in venture capital and other private funding – with AI leading the charge.