Investment Insights - Disruptive technology is the future

While the economy is suffering from the crippling impact of the coronavirus, technology companies are holding steady — even thriving.

Global lockdowns have accelerated the adoption of new technologies, boosting e-commerce, remote working, and other innovations. In fact, the largest technology companies could emerge stronger as economies open up from the COVID-19 enforced lockdown.

Uncertainty remains, both about the duration of the pandemic and the severity of the recession. However, the long-term secular trends that were around prior to the pandemic are accelerating. One of the most striking quotes has been from Microsoft Chief Executive Satya Nadella who said recently, “We’ve seen two years’ worth of digital transformation in two months”.

Emerson Point, one of NZ Funds’ New York based global investment managers, put together a sample of some of the trends that are accelerating:

• Cloud computing.

• ‘Big data’ analytic tools.

• e-commerce and the decline of legacy ‘brick and mortar’ retail.

• Digital advertising and the decline of legacy advertising.

• Digitisation of payments as consumers steer away from cash.

• Delivery services for food and groceries.

• Consumer focus on health and wellness which is impacting food, fitness and clothing.

• Willingness to pay for digital entertainment, media and trusted news.

Importantly, these were strong trends coming into 2020; COVID-19 is likely putting these trends into hyperdrive. What previously may have taken the next 7-10 years will now potentially transpire in the next 3-5 years, or sooner.

How has this translated to share market performance?

Currently, the S&P 500 is up 32.8% from its lowest close, and the technology-heavy Nasdaq is up 36.7% from its lowest close and is positive for 2020! Tech giants have been provided with a COVID-19 tailwind and are driving equity markets higher. Society is relying on technology for virtually everything amid this pandemic, but is that enough to keep the entire stock market afloat?

Apple, Microsoft, Amazon, Alphabet and Facebook account for 20% of the S&P 500’s value, a feat not achieved by just five components since the peak of the tech bubble in 2000. Back then it was Microsoft, Cisco, General Electric, Intel and Exxon Mobil ruling the market before the index crashed as the dot-com bubble burst.

The current technology run, unlike in 2000, is based on growing earnings and not the exuberant (and unrealistic) expectations of future profitability. And while some headwinds exist in the form of data regulation, anti-competitive behaviour and the sheer size of some of the players, we believe the market correction provided an ideal opportunity to re-enter the technology space.

NZ Funds’ positioning

As the investment environment changes, NZ Funds looks to position clients’ portfolios to reflect these secular trends. Over the past 12 months we have increased clients’ exposure to active managers with a growth and technology bias. This includes increasing our investment in Emerson Point, who specialise in technology.

More recently, we have increased clients’ exposure to technology shares by investing directly in the NASDAQ index. This has contributed to the strong recovery in clients’ portfolios since the lows witnessed in March.

It is said that every cloud has a silver lining and we are seeing new investment opportunities, both in New Zealand and globally, across shares, bonds and alternative assets. Our focus is seeking to capture these opportunities which are being unearthed by the current turmoil. As always, we expect the purchases we make today to deliver significant capital gains over the next two to three years.

Source: Bloomberg. For more information please contact NZ Funds.

This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.

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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.

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