Not everyone lost money in the stock market wipeout in February and March. News of the fast-spreading pandemic erased $6 trillion in value from global equity markets in six days, according to S&P Dow Jones Indices amid fears of the damage it could inflict on the world’s economy. But, a select few emerged as winners.
For example, Eric Yuan, the founder of Zoom, saw his net worth rise $200 million in the week, to touch $5.5 billion. K12 Inc., a US-based firm, which offers online educational services, jumped 19 per cent in the same week, adding about $5 million to the net worth of CEO Nathaniel Davis, according to Bloomberg.
Even as the broader economy faced a recession, tech stocks like Zoom and K12 rallied due to an increase in usage of video conferencing and remote work technology.
Video: How Covid-19 is Changing the Digital Landscape
Although technology was central to the economy and businesses before the pandemic, society has doubled down on that need since the lockdown. Just as hunting and gathering were probably humanity's first most successful adaptation, today almost everyone depends on cloud computing, streaming, and e-commerce to survive.
“Technology firms were increasingly central to the economy and businesses throughout the ages, but more so in difficult times like these,” says Jonathan Curtis, Vice President, Portfolio Manager and Analyst, Franklin Equity Group. “The driving long-term theme is what we call ‘digital transformation’, the idea that new technologies are changing the way companies do business, not just within the information technology space, but across the global economy.”
Pioneers of vital technologies will drive the post-pandemic investment market, according to Franklin Templeton, headquartered in the middle of the Silicon Valley in the US, in the proximity of leading tech companies, research universities and venture capital firms.
Here’s a look at the top 6 reasons why the world is heading to a new digital reality:
Welcome to the new normal
The Economist recently noted that one of the obvious consequences of the current pandemic will be “the infusion of data-enabled services into ever more aspects of life”. In short, expect digital transformation to be an even bigger imperative for organisations in the future.
During the Covid-19 outbreak, we have seen a dramatic shift in the role of technology in people’s lives, says Curtis. “The outbreak has forced several behavioural changes throughout societies across the globe, including how we work, shop and interact with others. These changes are accelerating existing dynamics at a faster pace, including the drive towards digitalisation of business and consumer behaviour. Those companies leading the digital transformation curve will come out ahead.”
Most valuable companies are now tech
The tech sector is dominating the equity markets and will continue to grow because of the digital transformation megatrend. Today 7 out of the 10 most valuable companies are technology related, according to Bloomberg. Apple and Microsoft are vying for the title of world's biggest company, each with a market cap of around $1.37 trillion. Amazon is close behind, at $1.19tn; Alphabet is worth $967 billion and Facebook $642bn.
“We believe technology has held up relatively well compared to other sectors during the most recent downturn and believe that the pricing is justified given the strong fundamentals we see in the space,” says Curtis.
Tech is profitable and valuations reasonable
Relative to its growth potential, the valuations of the technology sector (price-to-earnings ratio) remain reasonable and are nowhere near the dotcom era peak, according to Franklin Templeton Capital Market Insights as 31 Dec 2019. The sector is also the second most profitable sector in the S&P 500 Index.
“Coming into the crisis, IT and communication services were the third and fourth most profitable sectors of the equity market. From a balance sheet perspective, technology and communications were the second and third best positioned, with IT being net cash positive to a very large degree,” says Curtis.
Digitalisation to accelerate
The coming decades will feature even more growth in digital technologies, tools, and services, says Curtis. According to him, sectors that will see increased traction in the future are artificial intelligence and machine learning, cloud computing, data analytics, collaboration and workflow, cybersecurity, software as a service (SaaS), e-commerce, fintech and digital payments, digital advertising and 5G communications.
“We believe companies at the forefront of digital transformation are going to be industry leaders because the use of technology allows them to better understand their customers and business processes, become more efficient, drive productivity gains for themselves and their customers, and ultimately win their industries,” says Curtis.
The day after Covid-19
At some point in the future, everything will shift back towards a more normalised behaviour, says Curtis. People will once again go outdoors, visit theaters and shopping malls, travel for business and leisure, and go back to work in physical proximity with their co-workers.
“Years of digital transformation training has been accelerated during the pandemic and we expect many of these enhanced experiences to remain after the crisis. This is going to force the digital laggards to invest in technology to keep pace or face tough questions on why they lagged their peers during these difficult times,” says Curtis.
Sector outlook looks attractive
Ernest & Young recently noted that a number of fundamental shifts that occurred (during the pandemic) whose implications for the tech sector will extend far beyond the crisis. In the long run, as people adapt to a new life after Covid-19, the use of interconnected devices, artificial intelligence and the Internet of Things (IoT) is only expected to skyrocket. New tech infrastructure will also help economies recover after the pandemic.
“We believe that all businesses will need to invest more in digital technology to better understand and service their customers and partners at a competitive cost,” says Curtis. “Those businesses that do not make these investments, we believe, risk being disrupted by nimbler digital natives.”
“Given these dynamics, the tech sector looks attractive for investors with a multi-year time horizon.”
Get in touch with your financial adviser for evaluating an exposure to the technology sector.
