INNOVATION LEADS THE WAY
Thomas Davis, Global Equity Portfolio Manager at Jennison Associates, a PGIM Business, discusses megatrends in the home and workplace that have picked up speed,
2020 will be remembered as one of the most disconcerting periods in recent history as the devastating COVID-19 pandemic spread rapidly around the globe, disrupting markets and daily life everywhere. After soaring to fresh all-time highs in February, global equity markets suffered the swiftest and sharpest declines on record before starting an equally remarkable V-shaped recovery. While companies large and small are still feeling the pain from the abrupt halt to economic activity, opportunities have emerged for innovative firms able to meet changing consumer demand in this new social distancing climate. Not all of them will succeed. Active managers with a successful long-term track record can offer the critical analysis necessary to identify secular growth companies that may emerge as new market leaders. Below are highlights from a recent Q&A with Mark Baribeau, CFA and Thomas Davis, global equity portfolio managers at Jennison Associates, in which they share their views on compelling secular trends that they expect to get a supercharged boost in the post-coronavirus era.
It is clear that we are in a recession—how long it will last and how the rebound will play out (“V” or “U” shape) is the big unknown. The timeline around the eventual containment and mitigation of the virus, together with the depth and duration of the “shelter-in-place” mandate globally, is driving this uncertainty. To backstop the fallout, we’ve seen unlimited quantitative easing and fiscal and monetary policy being applied globally. Even as conditions stabilize, we are likely to see a prolonged period of the “lower for longer” environment in terms of interest rates, inflation, and economic growth—a backdrop that we believe will continue to benefit growth equities. But what’s even more encouraging to us as growth managers is that the current crisis is driving a renewed appreciation for technology and innovation-driven businesses. Extreme volatility typically drives investors into more defensive sectors like consumer staples and utilities and the defensive parts of the health care sector, as has been the case this time. But unlike previous periods of uncertainty, technology and the more innovative areas of healthcare have asserted their leadership in 2020, as they have over the last 10+ years.
Given the recent economic challenges, businesses and consumers have been changing their behaviors and actively seeking out innovative products and services that are more productive, cheaper, faster, and convenient. Post-pandemic the lasting impact on many shifts in consumer behavior could accelerate the collapse of already struggling industries while fostering growth in companies with more innovative business models. The epoch of this new disruption at a massive scale will affect some sectors more profoundly than others, widening the gap between the winners and losers. Darwinian forces between the disruptors and the disrupted could spark a new wave of industry consolidation that makes more powerful, resourceful companies gain even more industry clout at the peril of struggling business models.
The current disruption is giving investors a heightened appreciation of transformative businesses. We believe many of the winners of the last few years offer differentiated and disruptive business models that are even more compelling in the current environment. This crisis has illustrated the power of the mobile internet and its ubiquity in our lives. In a few short months, Amazon has been deemed an essential business, Netflix a cure to stay-at-home boredom, and cloud-based platforms a lifeline to businesses and employees during the world’s largest work-from-home experiment. Coming out of this, we expect to see a digital migration acceleration and escalating acceptance of technologies that will continue to drive tremendous growth and permanent migration into areas like e-commerce, streaming video and gaming, digital payments, and cloud computing.
While these companies have been around for several years, their unique ability to deliver at the right time and place and under the right conditions will meaningful accelerate demand for and adoption of their services and products, leading to greater penetration and market share gains. We’ve seen evidence of this already with retailers trying meet massive online demand for groceries, household items, and medicines while restaurants offer new, contactless deliveries/takeout option—services that require digital payment platforms for execution. Shopify is good example of a cloud-based platform with easy-to-use infrastructure tools and an omni-channel e-commerce capability that has helped small and medium-sized businesses during these times of restricted personal mobility. Meanwhile, video streaming upended the cable networks in terms of subscribers, with Netflix adding nearly 26 million new subscribers in the first half of 2020. Annual revenue growth for the top-four cloud-computing service firms ranged from 33-71% in 20191 but have seen demand climb recently as companies everywhere incorporate technological mobility into business continuity plans and upgrade technology infrastructure to modernize and protect their businesses. This will foster an enormous upgrade cycle where software-as-a-service (SaaS) companies will be big beneficiaries. RingCentral, a provider of cloud-based communications software that allows for business communications across multiple devices, locations, and modes, is an example of a company benefitting from the acceleration to unified communications in the decentralized work environment. Longer term, social distancing is likely to lead us into a new frontier of innovations and advancements in robotics and autonomy, virtual education, telemedicine, and customized drug therapies. We believe innovative companies in these areas will inspire and establish the “next normal” for society as we will know it in the future.
|On-demand Consumption||Streaming video and games; Virtual education; Telemedicine|
|Enterprise Technologies||Increased cloud usage and adoption of software applications; Collaboration tools and services that support remote work|
|Global Consumer||E-commerce; Retailers with strong brands and greater control over their distribution systems|
|Digital Payments||Contactless payments; Digital wallets|
|Robotics & Autonomy||Robotics that help with social distancing and productivity gains|
|Health Tech & Therapies||Customized therapies centered on genomes|
In general, we think successful growth investing requires a selective and active approach focused on carefully weighing the long-term opportunities against the risks. We believe there will be more market volatility in the months ahead, and stock picking will become paramount, creating challenges for passive investors. Active managers can look through the short-term noise and focus on the bigger long-term opportunities by spotting secular growth trends early. In uncertain times like these, there are still companies that can manage to remain cutting edge in making our daily lives more efficient with new products or in helping us to work together more productively with new services. These companies will continue to see healthy customer demand and sales growth and are the kind of companies we are on the lookout for.
1 Source: Statista.
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