When China’s leading telecoms operators launched their 5G data plans on 1 November, they were two months ahead of schedule in going live with one of the world’s biggest next-generation networks, demonstrating the pace of digital evolution in Asia’s largest economy. These high-capacity wireless networks provide the platform for the next wave of digitalization, further accelerating change across multiple sectors including video communications, entertainment, ecommerce, smart home and Internet of Things applications and vehicle telematics.
5G shows how new technologies transform entire industries, so creating opportunities for companies to boost their competitive advantages. At Columbia Threadneedle Investments we see this as a central investment theme that is playing out globally across many sectors. Fuelling it is the spread of technologies that include big data, robotics, AI and cloud computing.
Take the fashion business, for example. Spanish clothing multinational Inditex, which owns brands including Zara, has cleverly used technology to monitor changing consumer tastes and to accelerate its product cycle, cutting the time between designing a garment and putting it on sale. Turning to manufacturing, Keyence, a Japanese electronics company, makes AI-controlled systems that automate the world’s factories, so helping manufacturers to compete more effectively.
The investment upside
The companies that adapt to technology transformation most successfully are not just innovators: some have the capacity to fundamentally disrupt the way their industry operates, creating an existential threat to those that fail to adapt. Remember Kodak’s failure to keep pace with the digitalization of photography, how Apple’s invention of the smartphone displaced Nokia, or how Netflix’s pioneering of on-demand video sparked Blockbuster’s demise.
As a result, the winners from this process have extremely attractive financial characteristics. They generate high growth and sustainably high returns on capital employed, thanks in part to the competitive “moat” that network effects create for them – the more users they attract, the harder it becomes to compete against them.
These businesses represent a rich opportunity set that Columbia Threadneedle Investments focuses on globally, and one that will remain attractive despite the impact of Covid-19. We believe the world economy will remain in a long-term, low-growth regime after the pandemic recedes, placing a continuing premium on companies capable of strong growth and sustainably high returns. Indeed, such companies have recently traded at discounts of up to 30% to their pre-Covid-19 highs.
Enduring trends
While the pandemic has undoubtedly cast a shadow over the immediate outlook, the trends that are fuelling the growth of these winning companies are global and enduring.
For example, the world’s transition to cloud computing is a multi-year process that has much further to run. Cloud services is a fast-growing industry that will ultimately create a global market many times the size of the one that exists today. The huge capital investment required to achieve scale in this industry helps to entrench the advantage of today’s dominant players, including Amazon, Microsoft, Alibaba and Google.
Equally, Asia’s middle classes will claim a much bigger share of world consumption over the next few decades and their demand for financial services will increase significantly as their wealth grows.
This is likely to strengthen the position of trusted banking brands such as HDFC Bank in India and DBS in Singapore. Both have successfully used digital channels to reduce the costs of serving their existing customers and acquiring new ones, increasing their market share and creating competitive advantages. HDFC now processes 85% of transactions through digital channels, according to McKinsey, and has extended its reach to unbanked and underbanked areas through digital payments and cards. DBS has also made digital banking its dominant channel, enabling it to deliver a high-quality customer experience, achieve the lowest cost-income ratio among its peers and defend itself against digital disruptors.
Beyond the FAANGs
Technology is transforming every area of today’s economies, creating opportunities for investors that extend far beyond the traditional consumer technology names dominated by the US-listed FAANG stocks – Facebook, Apple, Amazon, Netflix and Alphabet (previously known as Google). Instead, the group of high-growth, high-return companies that Columbia Threadneedle Investments focuses on offers an extremely diverse, global set of businesses that span virtually every sector and are well positioned to benefit from long-term, structural tailwinds.
