FIS Digital – November 2021

Investors reap direct to consumer boom

A company’s ability to sell direct-to-consumer, cloud computing and digitisation in payments are key areas for investors to focus. Investors should invest in companies that have a business model aligned to how people want to buy goods and prepare for a separation whereby companies with the technology to adapt streak ahead.

Investors are questioning if index exposure to the tech sector will continue to be a source of future growth. The capital markets used to be a catalyst for growth, but more companies are staying private for longer, forcing investors to explore new approaches.

It means some investors are pondering more venture allocations to get exposure, said fellow panellist David Veal, chief investment officer, Employees Retirement System of Texas.

Alongside exploring technology winners, his eye is on those companies left behind. There is a risk that companies that don’t make the transformation will experience value destruction and should be excluded from portfolios at the risk they will be stranded, he said.

At ERS investment strategy is particularly focused on watching corporate margins in the US compared to overseas allocations. In the US, wage pressures are building and creating headwinds for companies. It makes emerging markets more of a focus, where ERS has had a signification allocation for years.

Both panellists stressed the importance of not just having a US centric view but adopting a global perspective noting that blockchain could revolutionise what is happening.

Still, Veal said the enduring belief that population growth and earnings growth would flow through to investor gains is challenged in emerging markets. He noted geopolitical risk and globalisation trends reversing with implications for multinationals.

“We need to recognise we live in a different world to one where globalisation was in full force,” he said.

Investors should remember there is no such thing as a mean reversion in technology – the genie can’t be put back in the bottle. For example, the Amazon-led e-commerce revolution might mature and slow, but it can’t be undone; bricks and mortar won’t suddenly replace online shopping.

“You want to be focused on the future,” said Mark Baribeau, head of global equity at Jennison Associates, who said that a new generation of companies are fighting against the big giants. For example, the next generation of insurgents don’t want to be beholden to the likes of Alibaba or Amazon to sell their goods and are using different systems (like Shopify) to sell direct to consumers.

Direct to consumer movement

One of the most important investor opportunities and key sources of disruption ahead lies in the direct-to-consumer movement. New technology is enabling entrepreneurs starting their own businesses to eliminate the middle person and directly reach out to their customers.

It is evident in the auto industry where the ability to market direct to consumers means manufacturers of new electric cars can sell online, avoiding dealer networks.

“They can keep the margin for themselves,” said Baribeau.

Moreover, innovation in the car industry is now focused on software.

“You don’t need to know how an engine works,” said Baribeau.

This different skill set means new producers’ biggest challenges will be scaling manufacturing to meet demand. Investors should avoid tilting to old incumbents since these companies’ electric vehicle production and sales comes at the expense of not selling traditional cars.

“I would focus on the upstarts,” said Baribeau.

Elsewhere, retailers like LuluLemon and Nike that have physical stores and an online presence have expanded their online sales and gained more control of their inventory. It means they can respond more quickly to changes in consumer tastes and move inventory to where demand is strongest in a new, flexible strategy wholly enabled by technology. Investors should choose companies that have a business model aligned to how people want to buy goods today, and prepare for a separation whereby companies with the technology to adapt streak ahead.

Digital payments

Financial services is another fast-changing industry. China has led the revolution in digital payments via new payment methods like WeChatPay and AliPay, helping transform China into a cashless society and providing end-to-end digital solutions as people use their mobile to transact. The next Fintech boom will occur in the wider Asian region and Latin America where technology will fill the gap traditionally underserved by banks providing convenient, cost-effective solutions that disrupt the market.

Other investor opportunities exist in cloud-based applications poised to replace mobile internet and allowing companies to move to state-of-the-art platforms rather than lumber on under legacy systems. Cloud solutions provide new security and infrastructure management cheaply that is also quickly and easily deployed and upgraded.

“It’s where we see more incremental spending going,” said Baribeau. “And investors just follow the incremental spending.”

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