November 30, 2020
It’s no secret Covid-19 pulled certain technology trends forward by a number of years.1 While it’s easy to assume lockdowns only temporarily induced these advances, it’s more likely they will lead to faster adoption that will persist for years to come, according to George Saffaye, global investment strategist at Mellon.
Since shutting their doors in March, many of the world’s largest financial firms have told employees there is no pressure to return to the office.2 But when the physical doors shut, metaphorical doors opened to a new age of work life: one where non-essential workers would embark on virtual meetings and remote client interaction. This resulted in notable tailwinds for companies that proved essential to the new reality of work.3 However, Saffaye says this is just the beginning:
“These are not short-term trends even if they were accelerated by the pandemic. These are long-term and they are going to be here for a while. When considering the valuation of many of the stocks that have benefited, it’s important to understand their long-term earnings power before assessing the valuation,” Saffaye says.
The trends are most prominent in companies that have been peripheral beneficiaries of virtual office life, according to Saffaye. These are companies that largely operate in the background to create an accommodative infrastructure for tech-dependent corporations.
Virtual conferencing and cyber security companies are two examples that fit this niche. Beneath the surface, other companies that help these industries improve their services are also benefiting. Saffaye is particularly fond of one such company, which specializes in tracking and analyzing customer and employee experience in person, digital, and IoT interactions utilizing proprietary AI-based technology.
“The pandemic accelerated the need to understand and engage with customers and clients around how well products are received,” he says. “And gaining this knowledge—not just in a survey—but through more detailed and actionable analytics is increasingly important.”
“Virtual conference software companies have already partnered with them to track measurable data points like click amounts, and how many times people log back in.”
Another industry, which Saffaye says is well-positioned for the business operations revolution, is the electronic signature market. While electronic agreements may have had a run earlier in the year due to lockdown measures and the inability for in-person signatures, longer-term secular trends, which are not going away any time soon, will continue to drive its adoption, he says.
“Regulatory issues around some industries where you had prohibitive use of electronic documents, or legal representational recording, are now breaking down,” he says.
Against this backdrop, the Federal Housing Financing Agency4 reported an uptick in the volume of emortgages purchased by Fannie Mae5 and Freddie Mac6 in the first six months of 2020 because of the pandemic.7 Other notable developments include the Federal Reserve Bank of New York announcing it would begin to accept certain documents with electronic signatures.8 The global e-signature market, which pulled in a total revenue of US$951.3 million in 2019, is now projected to grow at a compound annual growth rate9 (CAGR) of 24.6% from 2020 to 2030, according to market research firm P&S Intelligence.
Cross-industry deregulation is another big change taking place, according to Saffaye. While this trend is unrelated to the ‘new normal’ resulting from the pandemic, its momentum is steadily increasing with support from recent legislative action, Saffaye says. This includes new developments in the cannabis industry, online gambling, sports gambling and of course, online sports gambling.
In reference to a recent deal between a sports betting operator and a major television broadcaster of NBA games, he says: “Not only is the regulatory landscape becoming more accepting, but sports are becoming more accepting of aligning with betting, which has always been taboo.”
As of November 2020, only three out of 50 states had yet to introduce a bill to legalize sports betting, while six others recently joined 20 where it is already legalized.10 The remaining states recently introduced bills but did not pass them. One market research firm projects the global sports betting market (worth US$85 billion in 2019)11 will undergo a CAGR of 9.99% between 2020 and 2027, while another firm forecasts a CAGR of 11.5% for the global online gambling market (currently valued at US$59 billion) between the same period.12
Right place, right time?
While Saffaye believes technological trends and deregulation will continue to shape markets, a rotation into cyclical stocks has been dancing in and out of headlines following promising vaccine news.13 In mid- November, after two major vaccine candidates announced high efficacy rates, cyclical stocks in the energy, financials, real estate and industrials sectors received a boost.14 Saffaye believes industries buoyed by long-term secular growth trends, for instance cyber security, will also play a role in the recovery of cyclicals when the time comes.
“We think cyber security is going to be very well positioned to help companies across all sectors. For example, as we move toward greater use of big data and cloud technology, even traditionally non-tech sectors such as energy will need to be able to protect their data even more,” he says. “And factory automation, another trend we believe is important, will be crucial going forward for global trade, with the industrial and tech companies leading the way.”
“Even if there is a cyclical rise and value companies start seeing earnings growth on their side of the equation, the long-term sustainable growth trends of which we invest are not going to change,” he concludes.
1 Forbes: Covid-19 Accelerate E-Commerce Growth ‘4-6 Years. June 12, 2020.
2 Investment News: When will Wall Street get back to the office. September 8, 2020.
3 CNBC: Stay-at-home stocks like Zoom will ‘keep roaring’ until there is a coronavirus vaccine, says Cramer. October 15, 2020.
4 A federal agency that provides supervision, regulation and housing mission oversight of Fannie Mae, Freddie Mac and the Federal Home Loan Banks.
5 Fannie Mae: The Federal National Mortgage Association.
6 Freddie Mac: The Federal Home Loan Mortgage Corporation
7 Housing Wire: Remote online notarization is the proper path forward for digital closings. November 9, 2020.
8 Business Insider: E-Signature Market to Grow with 24.6% CAGR in Coming Years: P&S Intelligence. August 11, 2020.
9 CAGR: The average annual growth rate of an investment over a specified period of time longer than one year.
10ESPN: United States of sports betting: A updated map of where every state stands. November 3, 2020.
11 Research and Markets: Global sports betting market worth 85 billion in 2019. Industry assessment and forecasts throughout 2020-2025
12 Yahoo: Sports betting ETFs, stocks to surge more on legalization. November 5, 2020.
13 CNBC: Cyclical stocks maybe racing higher; but tech is still expected to be a long-term winner. November 16, 2020.
14 Financial Times: A rotation in equity markets starts to emerge. November 14, 2020.
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