Digital Economy strategy - Market volatility continues however company fundamentals remain healthy
• The ‘Decision’ theme contributed most to performance. • Online Travel related businesses benefitting from improving post-Covid demand • Valuations within the Digital Economy universe have become increasingly attractive
What’s happening?
Global equity markets were largely flat over the month of May, with the MSCI ACWI rising 0.2%[1]. However, the flat month hides that equity markets were weak during the first half of May followed by a recovery in the second half. Inflation and the rising cost of living; the upward interest rate cycle, Chinese economic weakness and the war in Ukraine are all contributing to the negative market sentiment that continues to weigh on risk appetite in 2022.
Many companies have now reported their first quarter results, and company fundamentals continue to be robust albeit there has been a noted divergence in performance between enterprise facing and consumer facing businesses.
Of those companies that we invest in within the Digital Economy strategy that have reported first quarter results, 72%1 have delivered better than expected revenues and provided better than expected earnings, suggesting that these businesses continue to grow faster than what was expected of them.
Portfolio positioning and performance
During May, our exposure to the ‘Decision’ theme contributed positive returns with online travel agency businesses Booking Holdings and Trainline benefitting from an improving demand for travel as lockdown restrictions ease. This trend has also been reflected in Fidelity National Information Services, the payment services vendor, who benefited from the growth of card-based transactions at physical stores and venues such as hotels and restaurants.
However, the ‘Delivery’ themes detracted the most from performance during the month. When Amazon reported results that reinforced that consumer spending is slowing down, due to higher costs of living to do with inflation and higher energy and fuel prices; they commented that their focus going forward would be on the optimisation of existing capacity rather than adding new capacity and this has weighed on the sentiment surrounding e-commerce related Real Estate businesses such as Prologis and Goodman Group. These companies had been performing well year to date but have now been subjected to profit-taking.
Within the ‘Discovery’ theme, we had already reduced our exposure to Social Media investments such as Snap and Meta Networks as indications were that the outbreak of the War in Ukraine had an immediate negative impact on global marketing and advertising campaigns. However, a disappointing pre-announcement from Snap during May suggests that the decline in advertising spend has continued into the second quarter.
During May, we sold our investment in transport and logistics company XPO Logistics, as we noted the easing in fulfilment bottlenecks, whilst rising fuel pricing could weigh on the profitability of their trucking business.
Cybersecurity companies have been reporting strong results, but these positive announcements have been largely ignored in the current market environment and share prices have fallen. This has resulted in some very attractive valuations in this area that we have not seen for some time. To take advantage of this, we have recently invested into Palo Alto Networks, who provide a platform of network and cloud-based security solutions whilst also reinvesting back into Splunk, a company that we had sold out of about a year ago. Both investments were made before they reported their results and both companies have delivered positive news which has lifted their share prices in the past week or so. Additionally, this has since buoyed the share prices of our other cybersecurity holdings.
Outlook
We believe that markets are likely to remain volatile whilst the geo-political uncertainty and macroeconomic concerns remain. However, the valuations within the Digital Economy universe have become increasingly attractive given the long-term growth potential of many of the companies in the group.
We continue to believe that the opportunities driven by the long-term themes within the portfolio remain intact and our focus on identifying well managed businesses, with proven operating models and large opportunities ahead of them is the right approach to investing in the long-term growth opportunities present within the Digital Economy.
Whilst many aspects of the Digital Economy delivered expansion during the Covid19 outbreak and continued throughout 2021, we are cognisant that questions will be raised about potential interest rate increases and inflationary pressures. However, we believe that many of our investments are in quality companies that should continue to flourish over the coming years regardless of the macroeconomic outlook and we would look to use any weakness in share prices as an opportunity to add to our holdings.
Reinforcing our long-term view on the opportunity that the digital economy presents is a recent quote from Bill Ready, Google’s President of Commerce, Payments, & Next Billion Users, at a recent conference, “Only 20% of retail is online, yet about 2/3rd of users start their shopping journey online, highlighting the importance of the role online platforms have in the shopping journey.”[2]
This firmly supports our opinion that the digital evolution is not an overnight coup, whilst some decisions had to be made in a hurried fashion in 2020 to ensure that businesses could remain operational during an unforeseen event there are still many opportunities developing as companies modernise themselves.
[1] Bloomberg as of 31/05/22, in USD
[2] Source: J.P. Morgan TMC Conference Takeaways, 24/05/22
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