Buy into themes accelerated by COVID-19

Technology disruption as the world undergoes a digital transformation has been accelerated by COVID-19.

At a glance

Technology disruption is still in its infancy, but the COVID-19 pandemic has accelerated the trend. With the market share of companies engaged in technology disruption in the single digits or, at best, the teens in many traditional industries, we see plenty of scope for them to continue gaining ground. A shift is also underway to a more bi-polar world of divided technology ecosystems, led by the US and China. Since this is less efficient, it will further increase the cost of developing tech infrastructure like 5G, benefiting the companies involved. We continue to see compelling investment opportunities in disruptive technology firms and enabling technologies, including 5G equipment makers.

Trends that are here to stay

Technology disruption is still in its infancy, but we believe the COVID-19 pandemic has accelerated the trend. As the trend for digital transformation progresses, tech and tech-enabled companies are continuing to gain market share at the expense of incumbent competitors in various industries. With the market share of companies engaged in technology disruption estimated in the single digits or, at best, the teens in many traditional industries, we see plenty of scope for them to continue gaining ground.

The struggle for tech supremacy is driving a shift toward a more bi-polar world of divided technology ecosystems, led by the US and China. In the short-term actions against individual tech companies could lead to near-term profit-taking, but building out competing tech systems will ultimately require greater investment in infrastructure. The rally from the March equity lows has also been based on major outperformance for mega-cap tech stocks, which may have left some investors with high exposure to these individual outperformers. These are both arguments in favor of a diversified approach gaining exposure to a broad range of investments that are set to benefit from trends accelerated by COVID-19.

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Technology disruption. We think thematic investing along technology disruption lines should outperform standard benchmarks in the medium to long term. This expectation is based on our view that the theme offers prospects for above-average earnings growth due to market-share gains. Among technology disruptors, we like platform companies with network effects and accelerating market share gain prospects. Among technology enablers, we like companies exposed to trends like cloud, big data, and artificial intelligence (AI). We stay away from companies with weak product portfolios, market share losses, or major cyclical risks.

The 5G+ investment opportunity. 5G connection offers 20x faster speed and 90% lower latency than 4G, enabling a multitude of emerging technologies over the next decade. We expect a 20x rise in annual 5G capex spending to USD 150bn in 2025, from USD 7.5bn in 2019. In the previous cycles, most of the upside came at the start due to the substantial infrastructure spending involved upfront. Hence, the enablers enjoyed the bulk of benefits. This time it’s different: 5G offers investment opportunities across many years and industries, including both enablers and platform companies, which will benefit from the economic value created at the later stages.

China’s new economy. The COVID-19 epidemic has allowed the leading online players to grab more market share and new users have stuck with the mega-apps even as lockdown restrictions were lifted. The Chinese government has indirectly accelerated the digital market’s consolidation by imposing stricter consumer protection regulations. Without the need to compete fiercely, consolidation supports leaders’ revenue prospects and their margin expansion potential. With 5G technology acting as the key enabler, we think these leaders will deliver above-market average earnings growth, yet they are currently trading at reasonable valuations. Focusing only on e-commerce would miss out on China’s other online industry segments that are poised to come of age. These include food delivery apps, travel agencies, search engines, cloud operators, data centers, fintech services, and online entertainment platforms.

Automation and robotics. The COVID-19 pandemic, arriving on the back of the US-China trade tensions, has clearly demonstrated the vulnerability of global supply chains. Following the crisis, companies and governments will likely seek to diversify their supply chains and bring them closer to home. We see several long-term beneficiaries of this trend. One is warehouse automation, which we expect to experience structural growth alongside the rise of online shopping. Another is factory automation—companies with automated factories have been able to maintain production through the crisis, a clear competitive advantage.

Food revolution. The rapid spread of the virus and its devastating human and economic consequences have highlighted the need for greater safety and transparency in the food supply chain. This could spur innovation. One potential area of growth is high-tech foods such as plant-based meat alternatives, which may help satisfy demands for greater safety and transparency. Furthermore, many cities have required restaurants to shift to delivery-only service, in accordance with social distancing measures, a trend we expect to continue even as virus concerns abate, consumer preferences shift, and urbanization continues. We expect the food delivery segment to grow by about 16% annually, and to be worth about USD 365bn by 2030.

Key investment takeaways:

  • The tech sector has been given a boost by the COVID-19 pandemic, outperforming the broader market amid indications that the crisis will accelerate the adoption of disruptive technologies.
  • The shift toward a more bipolar tech world focused on the US and China, plus the concentration of market gains in mega-cap tech stocks, makes us favor a diversified approach. We favor a number of themes that are well placed to benefit over the longer term.

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