This is a sponsored article from AXA Investment Managers.
In 2020 the global pandemic has brought forth an onslaught of redundancies, market volatility and general anxiety for the future of the economy and, indeed, for the very health and fabric of society.
Despite this, certain dynamic sectors – most notably the digital economy – have managed not only to survive but to thrive in this grave new world. Within the asset management community, one approach that AXA Investment Managers has positioned itself for such exceptional growth and opportunity is its Digital Economy strategy, which celebrated its third birthday on October 24, 2020.
Optimism about the strategy abounds because it is invested around the extraordinary intersection of not one but two Black Swan events. Defined by author Nassim Nicholas Taleb as financial events that both lie outside the realm of regular expectations and have extreme impact1, the first of these Black Swans is the birth of the internet that gave rise to the digital economy and the explosive growth of e-commerce.
The second Black Swan is the Covid-19 pandemic and its attendant lockdowns that have forced people around the world to stay at home and work from home throughout 2020. The extreme impact of this has been the unforeseen acceleration of demand for goods and services delivered both by companies already active in the digital economy and by more traditional corporations seeking to speed up their transition to digital.
When AXA Investment Managers (AXA IM) conceived of its original digital economy strategy in 2017, its main goals were to identify a theme which had assured longevity, would be multi-decade by its very nature and had ample runway to explore the opportunities ahead. That theme is very much intact and the events and effects of the pandemic – notwithstanding the devastating impact it has had on global health and welfare – will potentially only extend, accelerate and enlarge the opportunity.
The strategy makes a virtue of a fundamental, bottom-up approach exploring each of the 700-plus companies it believes belong to a multi-cap, multiple sector digital economy universe. Reduced to 250 companies when the investment team applies its filters for profitability and growth prospects, the strategy typically comprises around 50 companies at any one time. This focuses sharply on the overall online consumer experience whether in media, fintech or logistics. And it does so across the digital economy value chain to provide a pure-play approach that eschews the holdings of more traditional technology strategies that may include, for example, semiconductor manufacturers.
In this article
The four D’s of the digital economy’s value chain
This value chain starts with how people discover digital products and services, focusing on digital marketing and advertising companies like Hubspot and Tencent. It extends to companies that facilitate consumers’ decision-making and features such brands as Amazon and the UK-based online retailer Ocado Group.
Next in the chain are the companies like PayPal, Deutsche Post DHL and the Sydney-based integrated property-to-warehousing Goodman Group that manage payments and logistics to keep pace with consumers’ increasing expectations of same-day delivery. And, finally, the strategy explores and invests in less well-known digital specialists like cloud contact centre provider Five9 that deal with data and act as enablers for offline businesses looking to adapt to the fast-evolving digital landscape.
You ain’t seen nothing yet
The strategy, its related themes and sub-themes and the overarching investment process have all been tested robustly in the past three years. And AXA IM also believes the strategy will now begin to benefit both from key lessons learned and the accelerated growth in digital economy megatrends occasioned by the pandemic.
One of the underlying philosophies of the strategy is that when a technology becomes commercially successful, it goes on to address a far larger market than originally conceived or expected. It’s the immense scale of what has changed as a result of Covid – the shift to digital payments and how that’s supercharged PayPal’s growth, for example – that hints at the magnitude of what’s to come.
The headline numbers bear this out. Some 45% of consumers surveyed by PWC in autumn 2020 had made purchases via mobile since the pandemic began versus 30% pre-pandemic. Zoom registered 300 million daily meeting participants in April 2020, up from 10 million in December 20192. And Netflix added 15.8 million net new customers in the first quarter of this year, comfortably beating estimates of 8.2 million3.
The pandemic has also prompted an unforeseen demographic shift in engagement in the digital economy. While millennials and the Generation Z cohort have clearly been comfortable and active online consumers for some time, lockdown has catapulted the older generations into e-action. 63% of consumers surveyed by PWC are buying more groceries online and via mobile apps since the pandemic, while 86% say they are likely to continue to shop digitally even when social distancing measures are removed.4
Online grocery shopping and payments to grow exponentially
The pandemic will prove an inflexion point for the sector. Online grocery shopping is still in a relatively early stage of its evolution with an e-commerce penetration level of only 5.1% prior to the pandemic.5 Now, it’s set to get more and more traction on a global basis for years to come. Ocado Group’s 40.4% second quarter 2020 growth in retail revenue over the same period in 20196 suggests this journey has well and truly begun.
There is similar bullishness about the future of the digital payments sub-theme. PayPal and Visa, for example, are widely known as the most trusted conduits for online consumers’ digital cash. And they didn’t exactly need a Black Swan event to prove their relevance – as indicated by PayPal more than doubling its annual payment transactions from 6.1 billion in 2016 to 12.4 billion in 20197.
Less well known, though, is that digital payments only accounted for 11% of total global payments as of 20188. They now represent around 14% and industry expectations are that soon-to-be-released data about 2020 will reveal a step-function increase9.
Discovering diamonds in the rough
It’s not just household names with which the digital economy strategy has enjoyed success. Indeed, holdings in all investments are typically kept to less than 4% and the strategy tilts towards small- and mid-cap companies with market capitalisation of less than US$500 million.
Prospecting for one of its preferred sub-themes – virtual communications – and looking for smart companies in scalable businesses with proven revenue models, it discovered and invested in support sales and customer engagement software developer Zendesk. Customers are demanding more and better digital engagement from the online retailers from which they buy. Companies like Zendesk enable that greater level of connectivity. Thanks to its cloud-native status, not only has Zendesk been able to provide a smooth transition from office to virtual call centre settings but it’s created an essential infrastructure for the future of client engagement.
A small cap when the strategy first invested in it, Zendesk’s share price has increased almost 400% from $33.8 in December 2017 to $125.2 in November 202010.
For more information on Digital Economy, please visit our website: http://axa-im.com.hk/connected-consumer
2 https://blog.zoom.us/90-day-security-plan-progress-report-april-22/ (Zoom, April 2020)
3 https://www.forbes.com/sites/arielshapiro/2020/04/21/netflix-stock-up-5-after-hours-reports-158-million-additional-subscribers/#32dda01a3d18 (Forbes, April 2020)
4 Global Consumer Insights Survey 2020, PwC
5 BOFAM, Kantar, GfK, Intage – Global eCommerce, October2019
6 https://uk.reuters.com/article/uk-ocado-outlook/online-supermarket-ocados-sales-soar-40-in-lockdown-britain-idUKKBN22I0N1 (Reuters, May 2020)
7 Paypal’s number of payment transactions from 2012 to 2019, Statista, 7 February 2020
8 AXA IM. BOFAM – Global eCommerce, October 2019
9 https://www.axa-im.com/content/-/asset_publisher/alpeXKk1gk2N/content/evolving-economy-digital-economy-with-jeremy-gleeson/23818, Oct 22 2020
The above-mentioned securities does not constitute investment advice.
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This is a sponsored article from AXA Investment Managers.