Finding Value in Volatility
Unprecedented dislocations in various parts of the Treasury market have resulted in attractive relative value opportunities, including in 10- and 20-year bonds.
In a world of scarcer growth and rising competition, the future potentially belongs to companies that understand the transformative power of technology and successfully integrate it within their core business models. This was demonstrated and accelerated by the COVID-19 lockdowns of 2020, and the outperformance of technology and technology-related companies is a powerful reminder that the tech opportunity is no longer confined to hardware, software, and the internet giants.
The tech-driven growth is far from over, in our view, but it may evolve. We see a wide frontier ahead for new market leaders to emerge. This stands in sharp contrast to the broader market, which has shown a declining share of companies posting strong revenue growth, both in the United States and abroad. A little more than a decade ago, one out of two companies in the MSCI ACWI Index was growing sales at 15% or more annually. Today, it’s one in five.
Amid rapid technology change and adoption, our research points to three catalysts for earnings and revenue growth in the United States and globally:
Direct-to-consumer (DTC) business models are based on the growth of e-commerce and are becoming essential for certain types of companies to develop relationships with consumers and bypass intermediaries (and avoid the exorbitant fees or investments they require). They enable companies to build customer loyalty through superior personal service and expand their target markets, projecting their marketing and sales presence across borders without requiring new physical storefronts. The DTC model is fundamentally changing the competitive landscape in several industries, from retail, to entertainment, to electric vehicles.
The success of DTC companies is heavily dependent on other parts of the tech ecosystem. Tech enablers provide the behind-the-scenes infrastructure and expertise that supports e-commerce businesses. For example, certain tech enablers offer a single platform for companies to process payments around the world, greatly simplifying the merchant’s e-commerce operations. Tailwinds for these service providers appear to be strong: The transaction value for global digital payments was $5.4 trillion in 2020 and is expected to double by 2025.i Across the world, the long-term shift from cash to electronic credit and debit transactions will likely continue, with annual growth rates of electronic credit and debit transactions over the next five years expected to exceed 15% in the United States and Europe and 10% in China.ii
Tech enablers can offer one-stop service for businesses seeking to establish online storefronts, gain insights from customer data, and address evolving challenges such as security threats. This makes it easier for companies and entrepreneurs to quickly set up online while maintaining a direct brand relationship with customers — as opposed to an indirect relationship selling products through a third-party website.
Technology enablers offer opportunities to incumbents, but also to innovators and disruptors, which are building the scaffolding that businesses need in order to stay competitive and achieve scale. This trend is closely related to our third theme…
The emergence of cloud services represents a paradigm shift in technology comparable to the advent of the internet. For many years now, companies have been able to increasingly move their services and processes onto the cloud, raising their efficiency and allowing them to focus on their product or service. Globally, public cloud revenue is projected to grow at an average annualized rate of nearly 25% to reach $679 billion in 2025. Cloud migration has also driven demand for both software – the programming companies need to run their operations – and hardware – the servers needed to host and process software and data.
This theme is, in some ways, the latest iteration of a long-standing trend in technology: US capital spending patterns reveal an ongoing shift towards next-economy industries at the expense of old-economy industries. The growth of a business’s investment often directly corresponds to the business’s ability to exploit opportunities and raise its overall growth rate. Even among the scalable platforms, capex spending is higher than the overall market. This investment in technology infrastructure is a core driver of future revenue and earnings growth.
We are in a new world of technology-driven change. Across industries, companies are evolving to asset-light balance sheets, leading to higher margins and more sustainable profitability. Compared to asset-heavy models, benefits can include higher return on assets, lower profit volatility, greater flexibility, and higher scale-driven cost savings. For investors, we believe this represents an extraordinary opportunity to gain exposure to long-term growth and technology-driven trends.
i. Researchandmarkets.com, as of June 7, 2021
ii. Statista, as of January 2021