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Covid-19 cut both ways. On the one hand, it destroyed lives and livelihoods, wreaking economic havoc and disrupting long-established patterns of behaviour the world over. But in the wake of that wave of destruction also came the seeds of change.
If any single part of the market can be said to have benefited from 2020’s year of tumult it’s the tech sector. With so many companies relying on working from home with no specific end-date in sight, the providers of the digital means of doing business have thrived.
No surprise, then, that after a pandemic-induced lull through the dark days of March and April, tech returns skyrocketed through the rest of the year, with the Nasdaq offering a one-year return of 39.6% to the closing week of November.1 The S&P 500, by way of contrast gained just 15.7% over the same period.2
Perhaps this is unsurprising. Government-sanctioned lockdowns opened the door to people becoming ever more comfortable with the concept of online delivery for their essential goods and services. Online marketplaces reaped the rewards as did social media companies. If the retail apocalypse was playing out in slow motion ahead of Covid-19, the pandemic has pressed the fast-forward button, supercharging defaults, exits and bankruptcies.
This digital transformation, termed the Fourth Industrial Revolution – and which was already underway ahead of this year of change – is founded on the emergence of cyber-physical systems. These enable us, for the first time, to manage and control the physical world using digital tools. “Most of us are comfortable by now with a degree of digitisation in our lives, but the sheer scale of what’s coming might be a little daunting to comprehend,” says George Saffaye, manager of BNY Mellon’s Mobility Innovation strategy. “One of the most underestimated transformations we’re going to see is the shift from 4G to 5G networks,” says Saffaye, “5G is not so much evolutionary as revolutionary. In terms of everything from infrastructure to density to speed, it’s completely different.” In 4G, for example, you have 30-400 milliseconds of latency (delay). In an optimal 5G network, there’s less than one millisecond.
When we start to think about applications such as robotic surgery, running manufacturing operations, or feeding decision-critical information to autonomous vehicles, we can begin to see just how transformational 5G will be. The technology is so powerful that “we don’t even know what we’ll be able to build on it until it’s fully deployed,” continues Saffaye.
“You’re talking about a single platform that can run an entire enterprise,” he says. “And with edge computing, you can process and analyse data at the node where the information comes in, rather than relying on data centres. This means faster processing of information. 5G networks and factory automation will help re-shoring supply chains, with self-monitoring robots utilizing predictive analytics that can tell you when there’s a decline in the efficiency of a machine or maintenance needed. We are on the precipice of this now.”
Even so, there is still a lot of work to be done. 5G’s short wavelength requires smaller, more densely packed base stations rather than large towers. And high-speed Internet access still needs to be more broadly accessible before a genuinely digital economy can emerge.
There has also been a lot of forward movement in edge computing (the successor to cloud computing). Cybersecurity is growing more vital, as securing such robust systems will soon be “extremely critical”, says Saffaye. The electrification of utilities and transport is also going to make battery technology hugely significant. Then there is the emergence of the Internet of Things and smart-city technology that will see sensors embedded in buildings, roads and other infrastructure.
Fundamentally, the focus should be on the technological developments that can take the friction out of the economy. “The businesses that have thrived in this environment are those that had the digital infrastructure in place to anticipate these changes, and pursued effective digital engagement with customers,” observes Saffaye.
But is the market overvalued? “It’s tempting to think so, but investors have only fixated on these companies because of the way they’re playing into digital transformation,” he points out.
“Tech valuations have moved higher, but the important thing to remember is that, as opposed to the dotcom bubble, these companies have great business models,” says Saffaye. “They generate cash, they have real businesses that are transforming the world we live in, and we’re only at the earliest stages.”
“So, a better way to analyze these companies is first to understand the earnings power of their business models, their internet protocol (IP), how wide their moats are, and then assess valuations at the back end of that process. Often, the market doesn’t recognize just how differentiated a company’s prospects are, so while they appear expensive now, in three years an investor may look back and realize the stock might not have actually been expensive,” concludes Saffaye
1 Financial Times: Markets data as of November 25, 2020.
2 Financial Times: Markets data as of November 25, 2020.
S&P 500: The S&P 500 is an index designed to track the performance of the largest 500 US companies.
Nasdaq: The Nasdaq Composite Index is the market capitalization-weighted index of approximately 3,000 common equities listed on the Nasdaq stock exchange.
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