Digital Economy strategy: The holiday season continued to demonstrate the strength of the Digital Economy landscape

What’s happening?

Global equity markets continued to rise in December, with the MSCI ACWI gaining 4.7%¹ . Looking at 2020, the MSCI ACWI returned 16.8%¹ . Despite the Covid-19 global pandemic leading to the sharpest equity fall in history, markets subsequently recovered over the summer and reached new highs towards the end of the year.

The equity market was driven higher in December as approval for Covid-19 vaccines were granted in the US and several countries in Europe, providing the expectation of an easing of restrictions and lockdowns in the months to come. As the deadline was fast approaching, the UK and European Union finally reached a trade agreement to replace the current Single Market rules, ending months of speculation and uncertainty over the prospects for a deal.

The holiday season continued to demonstrate the strength of the Digital Economy landscape and the transformation of consumers' shopping habits. Ecommerce sales during the holiday season hit a record high, a market intelligence report issued by Mastercard reported US online sales growth at 49% compared to 2019, with consumers shopping earlier than in previous years as retailers rolled out their holiday promotions early. Paypal and Visa reached new all-time highs during December, supported by data such as this.

Portfolio positioning and performance

During December, our exposure to the Delivery theme contributed most to performance. We saw strong performance from cybersecurity companies Proofpoint and Zscaler. Within the Decision theme digital media conglomerate IAC performed well after announcing its plan to spin off its video hosting platform Vimeo.  Video games developer Activision Blizzard also performed strongly after positive news regarding the Call of Duty franchise and the new World of Warcraft release.

During December we participated in the IPO² of private rental online marketplace AirBnb. The company is well positioned to continue to gain market share as online private lodging is still relatively underpenetrated. Shares in Alibaba, the Chinese e-commerce leader, have been under pressure over the last two months due to the block placed on the initial public offering of ANT (their financial services business) and increased scrutiny into the company by Chinese regulators.  The shares looked oversold as we approached the Christmas market holidays, and we increased our position on the back of this.

Outlook

As we enter 2021, we will be rapidly approaching the anniversary of the global outbreak of Covid-19 and the lockdown measures that were put in place in order to contain the virus. We will continue to monitor the progress of vaccination programmes that have begun and the potential for economies to re-open and for life to hopefully return to normal as this year progresses.

With regards to our investments, there are some companies for whom 2020 put their growth on a trajectory far greater than was initially expected, and for these companies, they could face some difficult year on year compares in the coming months and quarters.  We have already taken some of this into account, for example opportunistically reducing our position in Zoom Video several months ago.  For some of our other investments, we believe that changes in consumer behaviour could prove to be sticky and they will retain a good proportion of new customers that they welcomed on board in 2020, as long term consumer habits shift, for example with online grocery shopping or at home entertainment such as video content or gaming.  Another category of our investments are those companies who have been providing technology solutions and services to enable their business customers to undergo their digital transformations, and we think that whilst some of these programmes might have been pulled forward in 2020 as a result of the pandemic, that there is still a lot of business to be done as companies adopt new ways to support their employees and customers even after the full effects of the virus have waned.

The underlying strong results in companies associated with the Digital Economy and the multiple secular growth drivers continue to underpin the healthy demand for innovative solutions to help businesses become more digital, productive and efficient. During this period of uncertainty we have remained focused on our investment philosophy, which is the preference to invest in companies who address a strong long-term opportunity rather than chasing niches or fads.  Therefore we feel confident that the majority of our investments play into the heart of the Digital Economy theme, and their business will remain strong, if not get even stronger, once the current turmoil is over.

Digital Transformation is expected to be an important business focus for the coming years, and the portfolio remains well positioned to benefit from the trends associated with the digital economy theme, such as online commerce, digital media consumption and electronic payments.

No assurance can be given that the Digital Economy strategy will be successful. Investors can lose some or all of their capital invested. The Digital Economy is subject to risks including Equity; Emerging Markets; Global Investments; Investments in small and/or micro capitalisation universe; Investments in specific sectors or asset classes; ESG.