The times we live in have exhibited more than their fair share of disruption. Technology-led innovation has fundamentally disrupted old systems, creating new business opportunities and marginalising old ones.
For investors, such a transformation creates exciting investment opportunities. Many sectors and businesses have already reaped the rewards of disruption and markets now find themselves at an inflection point: where wider macro concerns are prompting many investors to reassess the risk within their equity portfolios.
Yet, at such times it’s particularly important to remember that investment for most people is not about short-term gains but identifying long-term opportunities. The digital transformation of both economies and business will continue and investors need to stay ahead of these changes or risk being left behind.
So what are the catalysts to look for, where will superior growth and sustainable returns over the long term be found, what are the risks to be aware of and how can investors capitalise on this theme? We investigate.
There is no denying that the disruptive technology theme has been caught up in the dramatic retracement and volatility impacting markets during the last six months.
There has been a significant rotation from growth to value stocks, driven in part by inflation and the rising rate environment, which could persist for some time. In addition, geopolitical risks – notably the Russian-Ukrainian conflict and China’s zero covid policy – are adding to recession risks globally and have amplified supply chain concerns.
Many high growth companies, which invest heavily in products and sales capacity, have experienced an outsized impact from these near-term risks thanks to their longer-duration profile among other factors. Yet, sizeable corrections in valuations can create much better buying opportunities and so selecting the right stocks becomes even more critical during this period of high volatility.
… Positive themes
Despite these risk factors, there are also many reasons for optimism.
The long-term secular themes driving the digital transformation of the economy will continue regardless of the macroeconomic environment. It’s important to remember that the pandemic actually accelerated many digital trends.
Companies continue to see digital transformation as an imperative to remaining competitive in the future and this should further propel the adoption of cloud computing. Worldwide end-user spending on public cloud services is forecast to grow 20.4% in 2022 to total $494.7 billion, up from $410.9 billion in 2021, is expected to reach nearly $600 billion in 20231.
In addition, artificial intelligence is fast becoming a foundational technology with a proliferation of applications – including automation, the Internet of Things (encompassing edge processing) and financial technology – which should accelerate much wider adoption.
Disruptive technology trends are also enabling the creation of new products, services and business models, making operations more efficient and transforming the way we live and work.
But disruption is not purely a technology story – digital solutions are spurring change across all business sectors and are also set to thrive in the new world order by addressing societal issues through the provision of equitable access to communication technology, education, healthcare and financial services; as well as providing the energy and resource efficiency solutions to deal with climate change.
Semiconductor super cycle
The semiconductor sector is hard to ignore, particularly as it is currently at the centre of the conflict between concerns over headwinds (notably supply chain disruptions) and the prospect of further growth.
The pessimistic view foresees an impending inventory correction, as slower global growth dents spending on products such as smartphones and personal computers. However, a more contrarian (and optimistic) view is that secular growth drivers for the sector are so compelling that any correction is likely to be short-lived and unlikely to impact all segments of the industry simultaneously.
What is clear is that demand for semiconductors has been amplified by the digital transformation of the wider business world and the global industry is forecast to grow 10% in 20222. The end market has broadened from typical technology hardware to diversified industrial and automotive industries and has expanded into the domestic sphere – even smart domestic appliances such as washing machines and fridges now contain semiconductors.
While the industry continues to be caught up in the supply chain bottlenecks, the structure of semiconductor manufacturing has dramatically improved over the past 20 years so that it is now concentrated among a small number of companies. While on one hand this has provoked protectionist concerns that production should be less regionally focussed (many manufacturers are based in Asia), it has also resulted in more strategic capacity and less risk of structural oversupply.
The debate over semiconductors will continue to play out, but investors should not ignore the fact that semiconductors will remain a key foundational technology for digital transformation.
Staying ahead of the disruption curve
In such a rapidly changing world, it is easy to be overwhelmed. Yet, by taking a forward-looking investment approach investors can be well positioned to capitalise on the global megatrends reshaping the world’s economies.
At BNP Paribas Asset Management, our Disruptive Technology strategy is able to stay ahead of the curve by identifying the disruptive companies that are shaking up society. This is achieved by focusing on the technological themes that are at the forefront of disruption including cloud computing, artificial intelligence, automation and robotics, the Internet Of Things (IoT), as well as foundational and emerging themes.
We then identify the companies that fit these themes and have the potential for sustainable earnings growth as well as positive catalysts – in other words we look for companies that take a sustainable approach to their business and meet our required ESG standards and contribute to the three Es: Energy transition, Environmental sustainability and Equality.
This results in a concentrated portfolio of stocks that invests in developed and emerging markets and across the market cap spectrum – including mid/small cap stocks where much of the early-stage innovation takes place. It also has a cross-sector approach as the impact of disruptive technologies is not limited to the technology sector but is making is presence felt in many industries.
There is little doubt that disruptive technology will continue to shake up business and economies; we want to help our clients to stay ahead of these changes and be a part of the necessary transformation to reshape our world.
For more information about our Disruptive Technology strategy, performance and a more detailed investment approach please visit your local BNPP AM website via bnpparibas-am.com.