Disruption will continue to present long-term investment opportunities

Stock markets worldwide have faced a torrid start to the year. This risk-off episode has been linked to geopolitics, amid fears the war in Ukraine is escalating already disrupted supply chains; further Covid lockdowns in China denting both supply and demand; and the prospect of rising interest rates as central banks react to higher inflation.

Many investors are sensibly adopting a more defensive attitude in the face of such market turbulence – moving away from growth-orientated stocks, which have enjoyed a prolonged market rally and so some level of pullback is to be expected.

But is now really the time to shift portfolios away from the concept of growth completely? In the Age of Transformation, the world is rapidly adjusting to its new norms of an ageing population and the need to address climate change, as well as the ongoing pandemic recovery.

These are themes under which digital disruption and technological innovation will thrive, so could taking a completely risk-off stance prove costly for investors over the longer term?

Looking beyond the short-term
It would be foolish to deny that growth stocks – and the wider equity market in general – have been underperforming of late. Risk factors have risen considerably this year and growth companies are often more susceptible to inflation because company valuations are often based on future growth which could be eroded by higher prices.

Similarly, some areas of the growth sector – particularly those companies associated with disruptive technology – retain valuations that are higher than historical norms. However, it could be argued that such companies deserve these premium valuations versus the broader market due to their ability to improve returns on invested capital and offer superior growth prospects.

At every market inflection point, there will be winners and losers. When the dot.com bubble burst at the start of this century some companies did disappear, but others recovered and are now among the highest valued businesses in the world. Given the persistent trends centring around areas such as cloud computing, automation, the Internet of Things and artificial intelligence this current macro-oriented rotation away from growth should be relatively short-lived.

Yet, it’s important to remember that the growth tide is no longer lifting all boats, so selectivity will be increasingly important.

Change creates long-term value
In the last 30 years, innovation has mushroomed. Things we once thought impossible are now part of our daily lives. The disruption this has brought has completely transformed society and the global economy. From household products to healthcare and industry, every aspect of our lives has been changed by the technological revolution.

But technological disruption is not finished. In fact it’s just getting started. The pandemic is a great example of how a catalyst can accelerate a transformation that otherwise would have taken years. Efforts to build a more sustainable and just world is another potential catalyst that is poised to radically transform our economies, businesses and everyday realities.

As with the pandemic, technological innovation is likely to be at the forefront of these changes and the companies that develop solutions could become the household names of tomorrow, even if we don’t yet know them today.

Key themes
Identifying tomorrow’s winners early is the investment holy grail – and disruptive technology themes are likely to dominate. In the latest survey of Europe’s Fastest-Growing Companies 2022, technology accounts for 21% of the 100-strong list. And companies from other sectors are also heavily influenced by the digital business model – highlighting how the influence of technology has spread across the economy1.

Technology makes up 21% of Europe's fastest-growing companies.

In the midst of stock market turbulence, high inflation and slower economic growth, there will still be productive areas that continue to thrive and much of this will stem from the disruption and innovation needed to combat the world’s current economic challenges.

  • 5G: as with each iteration of the digital evolution, 5G tech is set to transform how we live and do business. Its superior speed and scale is expected to further open up the market for smart connectivity, as well as involve a greater use of big data, AI and the automation of vehicles.
  • Internet of Things (IoT): the growing connectedness of everyday objects via the internet will continue to have transformational impacts. As well as the proliferation of smart household objects, IoT is the backbone of many sustainable initiatives to improve efficiency in energy and water usage, and lower pollution through better traffic control.
  • Cloud computing: the technology behind file sharing may have benefited from the need to work remotely during the pandemic, but it is expected to continue its growth trajectory through factors such as mass notification systems (MNS) and the provision of remote services such as telemedicine. It’s ability to help businesses lower costs and improve efficiency could also be an important tool in defusing the current rise in inflation.
  • Fintech: blockchain is probably the fastest evolving area of innovative financial technology today, but advances in payments technology and fraud prevention also feature. Cryptocurrencies, decentralised finance (DeFi) and non-fungible tokens (NFTs) are also all fast-developing non-traditional platforms that are starting to erode the dominance of typical central intermediaries such as regulated exchanges or supervised banks and brokerages.
  • Artificial Intelligence: this is fast becoming a foundational technology that will be used across multiple business sectors, through developments in robotics, enhanced car safety features and even through automated software functionality.
  • Semiconductors: while there are fears that a recessionary environment would lower demand for semiconductors, a less consensual view suggests we have actually entered a semiconductor super cycle. As the digitisation of industry broadens, demand for semiconductor is coming from more diverse sources. For example, usage by the car industry is expected to rise 56% from 2021 to 2026 as manufacturers make more electric vehicles and cars incorporate more advanced driver assistance systems2.
Disruption will overcome volatility
Equity investors are facing numerous headwinds at present and ongoing market volatility will continue to create uncertainty. But given the falls already endured by markets this year, valuations are becoming more attractive for those with a long-term investment horizon. And when the dust settles, it will likely be disruptive technology innovations that will make a lasting impact on the world by transforming old industries and building real world assets.

Identifying the companies behind these innovations will not be an easy task, which is why an investigative mindset has never been more important. At BNP Paribas Asset Management, our team investing in disruptive techonoliges seeks to find those companies that are shaking up society.

They are able to stay ahead of the curve by focusing on the aforementioned themes they believe to be at the forefront of disruption. As well as seeking out the companies enabling or adopting innovative technologies and business models, they also look for companies with a sustainable approach to their businesses in order to meet our Environmental, Social, and Governance (ESG) standards.

In a rapidly changing world, we are helping our investors to see beyond the uncertainty and find the opportunities.

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