The accelerating cycle of technology
Looking back at the past 30 years, we realize how fast changes have happened in our society. The humble start of the Internet as we know it can be dated with the first web browser in 1993. The Internet bubble of the 2000 is merely 20 years old and the introduction of the iPhone happened only in 2007. Today, most people in the world have a smartphone and routinely read news, exchange with their family and friends, watch movies or purchase any object or services over the Internet on their phone or their computer.
Even before the Covid-19 pandemic, the market moved in large part based on the evolution of the largest technology companies. The largest companies in 2019 by market capitalization were Microsoft, Amazon, Alphabet/Google, Apple and Facebook (source: Visual Capitalist), with valuation close to or above a previously unheard of trillion dollar threshold.
The digital transformation of society has been a staple of our lives over the past 20 years. While corporations have been changing fast, individuals have adapted even faster, adopting new ways to communicate, exchange or transact. This transformation has accelerated over the past 10 years with the availability and prevalence of cloud platforms, mobile devices, social “many-to-many” networks and new algorithms leveraging data analytics and artificial intelligence.
The Covid-19 pandemic has forced individuals and corporations to adopt new behaviours like social distancing, work from home or e-Commerce. While the technology has been available for a long time, the usage – while growing fast – had remained lacklustre, as users did not want to change past habits.
However, within a few weeks of the start of the pandemic, with confinement and lockdown policies starting to be implemented, corporations urgently adopted new ways of working, leveraging online group meetings to replace travel and in-person meetings and enabling their employees to work from home. Even more prosaically, they had to rely on technology to ensure their daily operations could be performed, from logistics to closing their financial books.
Similarly, confined-at-home individuals started to increase their consumption of online media, from on-demand/streaming movies to video games, used online platforms to purchase food or clothing, and even kept social relationships through the same online platforms used in the context of their jobs.
In a mere few weeks, the pattern of adoption of this technology accelerated drastically without the available alternative to rely on old habits. The financial markets have not missed this trend, with information technology companies having seen a significant increase in their valuation since the beginning of the year, in spite of the economy facing one of the hardest recessions in decades, while sectors like energy or financials have been negatively affected.
However, within the sector itself, the performance is strongly differentiated too. The segments seeing structural tailwind momentum from the crisis have seen an explosion in their share price, while the more cyclical software companies have underperformed the sector.
In June 2020, BNP Paribas Wealth Management released its five investment themes post Covid-19. Unsurprisingly, in addition to Health Care, one of the key themes was related to investing to benefit from digital disruption, especially in relation to 5G and artificial intelligence. Another core theme relates to investing in quality companies.
These themes resonate strongly with the ongoing acceleration of the digital transformation of society. One of the key factors defining a quality company relates to its ability to leverage the possibilities enabled by new technology while being able to transition old business models to establish and preserve strong and resilient market positions. Interestingly, while there is still a view that technology companies are volatile, for the best of them, their role at the heart of the global economy is undeniable. It would be difficult for many businesses in the world today to operate without the cloud platforms of Amazon, Google or Microsoft for example, or to manage their business without Salesforce, SAP or Workday. Conversely, a number of technology solutions, while disruptive and useful, are much less critical to the operation of the economy and are not seen by the market as clear winners of the upcoming economic cycle.
Technology has been changing our society and the economy quite fast over the past 20 years. The unprecedented current situation related to the pandemic has accentuated the importance of technology companies in our daily lives. Technology has become a key determinant of quality, albeit not the only one. In that complex and fast-moving ecosystem, investors eager to play on this trend as part of their investment strategies need to stay rational and work together with their advisor to establish investment portfolios positioned to both benefit from the clear trends of the future while keeping a discerning outlook on quality assets.