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By André Basson*
As the year draws to a close, many South Africans are so ready to close the chapter of this rollercoaster of a year.
Last time this year, many analysts and economists had vastly different expectations than where 2020 has taken us. And for the first two months of the year these expectations played out. However, the world was turned upside down in March when Covid-19 spread from China to the rest of the world and stringent lockdown regulations, and subsequent economic consequences, took effect worldwide.
The JSE All Share Index started the year at just above 57 000 points and dropped to under 38 000 in mid-March. The local equity market recovered strongly in April and May, to just above 51 000 points, all on the back of global tech stocks running the worldwide show, fiscal stimuli pushed into markets by foreign forces and most importantly dominant digital drivers Naspers and Prosus still dictating the direction of the JSE.
Technology stocks outperformed other sectors by far in 2020 and delivered great gains for investors and pushed the wealth of the tech billionaires like Jeff Bezos, Elon Musk, to incredible heights. After the electric car company’s – Tesla’s – latest bump in share price, the SpaceX-Boring Company-Neuralink founder is now worth $127.9 billion, according to Bloomberg, just overtaking Bill Gates and his $127.7 billion while still below the $182 billion controlled by Amazon’s Bezos, who remains the world’s number one in riches.
The market rally in 2020 was led by a fairly narrow range of tech stocks, in particular Amazon, Apple, Microsoft, Facebook and Alphabet, the owner of Google.
This was primarily due to the justifiable perception that these companies are dominant in their respective fields, have high rates of long-term revenue and earnings growth, and have been beneficiaries of forced changes to work, social and shopping practices during lockdown.
These FAMAGs stocks capture 25% of total US value and the mega-cap technology platforms now account for a quarter of the entire S&P 500 market capitalisation (these stocks eclipsed almost 25% of the index).
Whereas the technology sector in 2020, and particularly the largest platforms, have delivered exceptional revenue and earnings growth which is expected to continue into 2021 and beyond. Covid-19 has clearly accelerated the adoption of new technologies such as e-commerce and remote working, with Zoom, Cloudflare and Fastly making their debuts as strong contenders.
These changes in corporate and consumer behaviour will likely continue after the pandemic. Corporates have already changed their working practices and “fast-tracked” changes that were already underway–such as a transition to the Cloud or rapid adoption of automation–and will likely accelerate these plans further as the benefits become apparent.
E-commerce has proven itself during the pandemic across a wide range of areas. In many parts of the world, e-commerce penetration levels are still relatively low, providing potential for continued and substantial growth. In short, the “technological transformation” already underway well before the pandemic has simply been accelerated by Covid-19.
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Technology will continue to provide a fertile hunting ground for investors in the coming years. The biggest risk to the sector is likely to come from regulation, rather than any rapid diminishment in the underlying growth rate.
Local investors are uncertain as to how they access the sector so underrepresented on the South African market, considering the foreign exchange complications of directly buying shares listed on especially the US Nasdaq market and the S&P 500 in New York.
The solution lies in a selection of funds available to South Africans offering opportunities for investing in rand as well as in dollars.
Brenthurst uses a range of funds for direct offshore investing in dollar, including but not limited to these, which provide exposure to the digital and development themes:
MiPLan Global IP Opportunity
Sygnia 4th Industrial Revolution
Sygnia FAANG Plus
Sygnia Healthcare Innovation
Ninety One Global Franchise
BCI Fundsmith Equity
However, it is important to note that chasing yesterday’s winners should not be the focus of an investment strategy. An investment plan must always be designed to suit an individual’s investment goals, risk profile and personal circumstances. The best approach is a portfolio that includes exposure to a variety of sectors, regions and asset classes, not only the current star performers, even if its outperformance is expected to continue.
Taking a step back from the pain of Covid-19, the noise of politics, and the uncertainties around the trajectory of economic recovery, most of us would agree that there are small number of undeniable and substantial trends that have the potential to materially affect the way we live, work, socialise and interact in the future. Some of these trends (often referred to as “mega-trends”) are not new: climate change, healthcare innovation, urbanisation, automation and digitisation have been relevant themes for many years now. Others such as sustainability, food and water provision and changing lifestyles are emerging as important and urgent areas of change, driven by population growth and rising consumerism in emerging markets. Looking towards the new green industrial revolution as an example of the rapidly increasing importance of certain key themes, global climate change is a case in point.
In order to stabilise global temperatures within the +2 degrees C limit defined as “safe” by the Intergovernmental Panel on Climate Change (IPCC), spending on greenhouse gas mitigation will have to rise to at least $2 trillion a year over the next 10 years. That cost will have to be borne by governments, consumers and of course, companies. Green policy momentum is now building rapidly, led by the European Union with ambitious targets to reduce emissions by 2030, and the EU Green Deal channeling at least a quarter of the €750 billion recovery package towards decarbonisation initiatives. The EU has committed to becoming a net zero carbon economy by 2050, and China has also committed to achieving that goal by 2060.
More broadly, the transition to a green economy will offer tremendous opportunities for investors as investment builds and adoption rates surprise on the upside. The same is true for other key trends where innovation is rising.
Read more about offshore investing.
- André Basson is head of the Brenthurst Val de Vie office. firstname.lastname@example.org.