At a glance
The COVID-19 pandemic has given a burst of speed to the technology industry, accelerating the adoption of disruptive technologies from retail to healthcare. The sector has also significantly outperformed the broader equity market, and valuations now look fair. But many parts of the technology sector are being propelled by secular trends and continue to offer opportunity to long-term investors.
Trends that are here to stay
The COVID-19 pandemic has given a burst of speed to the technology industry, accelerating the adoption of disruptive technologies from retail to healthcare. The sector has also significantly outperformed the broader equity market, and valuations now look fair. But many parts of the technology sector are being propelled by secular trends and continue to offer opportunity to invest in the area where technology meets economy:
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Enabling technologies are shaping society. Promising enabling tech areas are becoming mainstream. We believe three of our five enabling technologies have the potential to transform the global economy over the next decade. These include AI, 5G and AR/VR. We forecast spending on these three segments to jump by more than 10x from 2019 to 2020, growing from USD 27bn to USD 300 bn. Meanwhile the increased use of these technologies and the accumulation of data pave the way for cybersecurity to continue to increase in importance. Globally, cybersecurity incidents are rising by 20–30% every year. Security is no longer merely a concern of IT managers, but a key boardroom topic. Even the big IT platforms will need to adapt in the decade ahead.
Technology is shaping how we work, learn, and consume. In the years ahead, we expect the consumer to lead an increasingly digital lifestyle. We expect these digital lifestyles to drive further adoption of e-commerce and electronic payment solutions. E-commerce penetration should increase due to the crisis. The lockdown measures implemented in response to the spread of COVID-19 have clearly hurt in-store sales, but there's also been a significant uptick in online shopping. We expect global fintech revenues to grow from USD 150bn in 2018 to USD 500bn in 2030, implying an average annual growth rate about three times faster than the broader financial sector’s. Beyond the consumer sector, digital technologies will have a broad-based, cross-sector impact, and will change the way healthcare, education, and other resources are accessed.
Technology is changing the use of land. A variety of factors are likely to drive a shift in real estate demand. We expect remote working to increase, potentially impacting the demand for office space in urban locations, while at the same time supporting data center investment. A further shift to e-commerce and faster delivery times should be a long-term positive for warehouses. Meanwhile innovative smart food farming methods have changed the real estate landscape.
The competitive landscape in technology is shifting rapidly. From a company standpoint, we think mid-cap tech innovators can emerge from their large-cap counterparts’ shadows. Looking further out into the future, still-nascent but potentially groundbreaking moonshot technologies such as quantum computing, neural interfaces, and solid-state battery cells could disrupt the current marketplace.
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.
- But while the sector is now more fairly valued, it does offer longer term value.
- We see particular opportunity in the area where technology meets economy – such as fintech, cybersecurity, smart mobility, and robotics.
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