Global lockdowns have accelerated the adoption of new technologies. The digitalisation trend has moved forward with a leap, benefiting from the stay-at-home measures to deal with the coronavirus pandemic and the boost these gave to e-commerce, remote working and other tech areas. Satya Nadella, Microsoft’s chief executive officer, referred to “two years of digital transformation in two months”.
We see several key trends:
- Adoption of cloud computing: Growth is driven by the need for remote working, online entertainment and telemedicine. Other factors include mass notification systems (MNS) and the remote provision of services. In terms of MNS, we have seen more and more governments use them to send emergency communications to one or many groups of people. And with much of the world in lockdown, services providers have been using augmented reality (AR) through customers’ smartphones to identify and troubleshoot problems remotely.
- Acceleration of e-commerce: Visa recently reported that in Latin America, the number of people using Visa credit card online increased by 20% (13 million people) in one quarter.
- Digital payments: Similar to the above, there has been a rapid increase in ‘card not present’ transactions. This is a card transaction, made either online or by phone, where the card is not physically present.
- Uptake of 3D printing: Thanks to the often flexible and local nature of 3D printing, individuals and companies have taken to using it. As a case in point, Cisco employees have been producing face shields for healthcare workers.
- Automation: In addition to, say, robots in factories, there has been growing interesting in software to automate customer services and other business functions.
Future investment strategies
Uncertainty remains, both about the duration of the pandemic and the severity of the recession. Stock markets might be too optimistic about the timing and strength of an economic rebound. Our strategy is to stay focused on our secular growth themes of cloud computing, artificial intelligence, data analytics, automation and the Internet of Things (IoT).
We aim to maintain a balanced portfolio by owning defensive positions that could fare well during periods of heightened volatility and companies that have sustainable business models and exposure to long-term secular growth themes but may face a more challenging short-term outlook.
To this end, we hold slightly higher cash positions at the moment and remain flexible to buying stocks linked to the above themes should their valuations come down due to volatility.
The opportunities in coming months
The pandemic and resultant economic recession shine a spotlight on societal issues where technology can create solutions:
- Inequality – especially via better access to broadband and financial services and banking.
- Renewable energy – harnessing solar and wind energy to power the data centres behind the cloud.
- Increasing the capacity of the healthcare system – technology can monitor a patient’s health at home while telemedicine can help to treat the sick at home.
We are currently going through a period of profound change that offers numerous opportunities for investors to position their investment portfolios for further growth in disruptive technology.
Innovation is not just technology
A promising strategy should interplay the latest developments from solid players across diverse sectors, and capture performance that is sustainable both in financial and ESG terms. For example:
- ‘Disruptive technologies’ do not all fall within the tech sector.
- Real innovations exceed sector barriers, providing investment opportunities that purely sector-based strategies may miss.
- Targeting companies that are sustainable in both the environmental, social and governance (ESG) and the financial sense, i.e. with high ESG standards as well as robust business models that ensure competitiveness and growth.
Our disruptive technology strategy looks for stock ideas throughout the economy and is not limited to the technology sector. For example, say we own Amazon because of its strong position in cloud computing, even though the stock is classified in the consumer discretionary sector like other retail companies. The stocks we would pick can be found in sectors as diverse as industrials, communications services, healthcare, financials, consumption and energy.
In addition, we monitor emerging technologies, such as 3D printing, blockchain and renewable energy. We can take exposure through stocks in related fields rather than directly targeting niches. So, cryptocurrencies can be represented by providers of powerful semiconductors that enable rapid calculations.
In cloud computing, we invest in both the large companies that provide cloud infrastructure services, as well as companies that provide software applications as a cloud service.
One can invest in artificial intelligence and data analysis via the financial services and healthcare sectors. Finally, the Internet of Things can involve sometimes unforeseen applications. Stories are proliferating of people saved by their internet-connected watch allowing for a rapid medical diagnosis.
A better world or the best of worlds?
We believe that the use of machine-learning algorithms will create economic value by making long and complex processes more efficient and by providing enhanced decision-making tools. However, there are pitfalls. The effectiveness of any algorithm depends on the quality of the data used to train the artificial intelligence.
For example, genetic data has historically been biased because it was primarily sourced from non-diverse populations of European descent. In addition, AI for facial recognition can be misused by governments and other actors to invade privacy or to create fraudulent videos. This illustrates the need for regulation to ensure proper use of these powerful tools.
Beyond moral and technical considerations, the question of abuse of dominance arises when one looks at (the giants of) technology. It has given rise to debate about the need to regulate or even dismantle companies. We are actively monitoring stocks that are exposed to the threat of tighter regulation.
Investment managers should take an active, fundamental approach to investing in disruptive technology trends. We meet companies, suppliers, customers, competitors, industry experts, academics and others to enhance our knowledge of the changing technology landscape.
The right time to invest?
Looking at valuations, technology stocks are currently trading at a 10% premium to the broader market based on a forward-looking 12-month P/E ratio. This is in line with the historical median since 1995. We believe this premium is justified by the superior growth prospects of the technology sector.
The current macroeconomic and geopolitical environment is highly uncertain. Most of the sectors we invest in, including technology, industrials and consumer discretionary, are cyclical. However, we believe investing in companies with strong secular growth drivers makes sense across cycles. Even in the event of a sharp slowdown, we expect companies not to freeze all of their technological investments but focus on the more innovative parts of the industry.
Accordingly, we view disruptive tech investing as a long-term (three-to-five-year) strategy, which involves keeping a close eye on the changes that can arise rapidly in this field.
Pam Hegarty is a Senior Portfolio Manager and equity analyst for disruptive technologies at BNP Paribas Asset Management and based in Boston.
Some sections of the above appeared in The Intelligence Report, 15 October 2019.
This information is issued by BNP PARIBAS ASSET MANAGEMENT Australia Limited ABN 78 008 576 449, AFSL 223418. The information published does not constitute financial product advice, an offer to issue or recommendation to acquire any financial product. You will need to seek your own advice for any topic covered in the article. Investing in specialised sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).