Drivers of change and disruption
As companies become compelled to re-define their industry positioning due to structural changes, internet and mobile technologies have been at the forefront of the discussion and the backbone of the proliferation of innovative business models. To put this into context, global IT spending estimates at the start of this year suggested that cloud investments, with a public penetration rate of only 10%, will lead the software sector to be the fastest growing in 20204. The impact from the pandemic may accelerate this trend as businesses adapt to the importance of an online presence, sharpening the need for best-in-class network infrastructure and data analytics, as well as a demand wave for ancillary tech products. Meanwhile, advances in 5G, robotics, artificial intelligence (AI), data storage and analytics, the internet-of-things, digital payments, and cyber security represent significant tailwinds that may drive demand across semiconductors, hardware, and software.
We see these advances becoming increasingly vital core competencies across sectors. Internet retail businesses have evolved the e-commerce landscape, from warehouse mobile robots to drone delivery to group buying, all of which aim to enhance the consumer experience. Biopharma companies have embraced AI and machine learning to improve predictive analytics for patient conditions while cutting costs. Manufacturers use data analytics to improve procurement and pricing. Banks are pouring capital into blockchain technology to streamline operations. Translating these observations into portfolios, traditional equity exposures are evolving beyond their official sector classifications. New economy developments will be central to driving returns as we invest into the broad market*.
We believe the role of new technologies has been augmented across industries amid the Covid-19 pandemic. While tech stocks have been the top contributor of returns to standard equity exposures, these broad market indices may continue to evolve as new economy business models develop across sectors, making technology a persistent theme to be considered when making investment decisions.
*The specific issuers/securities discussed are for purposes of explaining the investment strategy, and should not be construed as research, investment advice or a recommendation, or an offer or solicitation to buy or sell any securities or to adopt any investment strategy.
- Investment risk: A Biden presidency posts key risks on policies and regulations related to major tech players e.g. corporate tax rates, data privacy law
- Geopolitical risk: Tensions between US and China post risks of interruption on supply chains of hardware components and international trade
1 EBITDA is a measure of cash flows and stands for earnings before interest, taxes, depreciation, and amortization. Net debt measures total debt less cash.
2 Source: BlackRock, as of Aug 21 2020, based on year-to-date data.
3 Source: I/B/E/S data from Refinitiv, as of Aug 13 2020.
4 Source: Gartner, Global IT spending report. As of January 2020.
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