Please see the below article by Jupiter which we received yesterday (07/07/2020):
Head of Strategy, Emerging Markets
Technology – a bright spot in Emerging Markets
Technology has been a welcome bright spot as we have weathered the global coronavirus pandemic and subsequent social and fiscal response. While the worst of the market reaction appears to be behind us, many emerging and frontier market companies are trading on valuations at or near historic lows.
The same valuation case cannot be made for the technology sector as a whole, given recent strong performance. However, for some companies that are key enablers of long-term technological change, we believe that share prices don’t yet fully reflect the positive outlook. South Korean consumer electronics and semiconductor companies Samsung Electronics and SK Hynix continue to benefit from industry consolidation and now rising demand from other sectors aside from smartphones. The global market for DRAM memory chips – previously characterised by aggressive capex spending and price wars – has now become a global oligopoly with Samsung and SK Hynix two of the three players (alongside US-listed Micron). This means the market is fundamentally different with greater pricing discipline and more rational behaviour.
Market-leading semiconductor chip makers TSMC and Mediatek, both in Taiwan, are also well-positioned to benefit in a post-COVID world. Lacklustre demand for consumer electronics products is being shored up by demand from the rollout of 5G networks and rising demand from servers as people consume more data and employees work from home around the world. We think this is a trend that could continue. People are slowly going back to work, but companies now need to consider the ability of their systems to allow employees to work remotely.
Elsewhere, COVID-related restrictions are driving change in consumer behaviour. More and more consumers are making purchases online. Internet companies are at the forefront of this change, but this is not limited to the Chinese tech giants Tencent and Alibaba. Chinese online retailers JD.com and VIPShop are both benefitting from the shift. The move to cashless payments is another change which is being accelerated by the global response to COVID. One way to gain access to this trend is through payments technology and services companies which provide the equipment or infrastructure to transact digitally. While some of the global leaders are in the US, there are a number of market leading players throughout emerging markets.
The technology sector has had a strong run through the crisis and we believe the long-term structural changes behind the sector are likely to persist. However, our investment process leads us to be wary of consensus and has, in a number of instances, driven us to look beyond the most well-known names in the index and invest only in those companies where we believe the market currently underestimates their potential.
Outside the technology sector, we continue to find that examples of underappreciated positive change in markets that appear overlooked by investors in the current climate, including frontier markets, Mexico and Turkey. But there are opportunities to be had in Asia and Latin America as well. Investors have to be willing to look beyond the headlines and short-term noise to find operationally robust companies, trading on attractive valuations and exposed to long-term trends which can continue to drive returns over time.
Guy de Blonay
Fund Manager, Global Equities
The financial technology revolution
In a very broad sense, the unthinkable happened as Covid-19 broke out – most of the world decided nearly simultaneously to suspend all activity. Lockdowns have started to be eased in certain parts of the world but there is still a lot of uncertainty around the shape of the recovery and the risks related to a second wave of infections.
Amid all this uncertainty, one aspect of it all seems clear: The financial technology revolution we have discussed in the past remains firmly in place with the pace of change now accelerating. In a recent survey, 75% of Fortune 500 CEOs said technology transformation has gained speed following this crisis.
Obviously, economies will start to re-open and activity will gradually go back to normal at some point. But in some areas, we believe the evolution in company, employee and customer behaviour has reached a tipping point. There are three sub-segments in the financials and financial technology space that look particularly promising to us: digital payments, remote working and cloud computing.
The transition to electronic payments has been a key theme in the portfolios for some time. The decline in retail sales is a headwind for the sector in the short term. But longer-term, in the words of Gary Cohn – former director of the US National Economic Council, “Covid-19 is speeding up the death of cash”. The World Health Organisation has pushed electronic payments as an alternative to banknotes – a potential vector of germs and – in the UK cash withdrawals have halved since the outbreak. E-commerce is another driver of the transition to cashless societies as the closure of stores has pushed merchants and consumers to migrate to online platforms. Overall, the low penetration of card payments and e-commerce in developed economies bodes well for the growth prospects of the sector.
Working from Home (WFH) and Cloud Computing represent another promising sub-theme. WFH is now socially and professionally acceptable. Jes Staley, Chief Executive of Barclays, said that “the notion of putting 7,000 people in a building may be a thing of the past”. His views were echoed by a recent CFO survey from Gartner. 74% of respondents said they would move 5% or more of their on-site employees to remote positions once the lockdowns are lifted. The first winners of these changes are likely to be the companies that provide tools for employee collaboration. But remote working also means employees have to access data and application outside the traditional security network. Innovative cybersecurity vendors like Okta will benefit.
All things digital – including WFH – need the cloud to deliver their functionality and services. Cloud is also a driver of business resiliency which is coming at the top of the CEO agenda in a context where the pandemic has disrupted the operations of financial services institutions worldwide. While some companies had to send their entire IT staff back home, cloud infrastructure providers like Amazon, Microsoft, Google, Alibaba and Tencent have demonstrated they could ensure continuity of service for mission-critical systems. Beyond these giants, the mass adoption of cloud computing should also benefit the broader ecosystem of software and services providers that help companies such as financial institutions to modernize their IT systems.
Fund Manager, Global
Microsoft – defying gravity
The coronavirus pandemic has radically altered the way we communicate, how we socialise and how we work. This societal shift has proved a great opportunity for companies exposed to this rapid change, and one notable example is Microsoft.
In fact, Microsoft is a stock that to many is defying gravity having rallied back to near all-time highs just when the economic background appears so challenging.
When analysing investment opportunities, above and beyond everything else I am always looking for something that positively differentiates that business from its peers. Sometimes that is a personal observation or judgement. Right now, we have a rare situation where we can share and experience that unique ‘differentiator’, understand its importance and try to value its worth to society and equity investors. Right now, we are living Microsoft Teams, a previously considered modestly useful application integrated into Office365.
Teams was, until recently, considered an incidental application within the Microsoft product range. Now it is a critical addition to Microsoft’s strategy of bundling software products, security, analytics, AI and so on through the cloud to sell to the corporate world. All this leveraging from Office 365 with businesses on long term contracts which are priced off volume of workload data (which tends to go up – hence the high recurring revenue model). Teams provides a competitive advantage, is competing with the equally successful Zoom, both of which have provided unwelcome competition to existing video conference market incumbents.
Turning to the numbers: Microsoft recently reported positive earnings. Sales for the quarter were at 15% and it maintained its start of year guidance of 12% full year. Not bad for a $1.4tn market capitalised business to be able to grow sales at a rate 3-4x the rate of global GDP in a normal year.
Given the economic situation, it is important to also reference previous downturns in 2003 and 2008. In these years, Microsoft reported a significant loss in sales momentum. Both are useful references but are very limited in their predictive ability. We know that Microsoft is a completely different company now. In previous years, the business focused on hardware, phones, computers to the consumer. Fast forward to today, and the focus is selling bundled software to the corporate customer.
Of course, that’s not to say that Microsoft is without risk. While it does have some transaction business risks and is not immune to economic risk, but the company’s earnings reassure the market that the investment case remains very much intact and it is set to continue to be, I believe, a strong performer in this economic environment.
Another interesting insight from Jupiter Asset Management.
COVID-19 has completely changed how we live and work this year, in a way the world has never seen before, and its impact will be felt for a long time.
The change to how we work i.e. working from home has clearly boosted the technology sector within the markets.