world in transition
The future is digital
Digitalisation has had a tremendous impact on our world and continues to reshape every conceivable aspect of our social and economic norms. This has important implications for the vast majority of companies across all sectors. In our view, the investment process needs to reflect this rapid evolution, which is still in its early days.
At Lombard Odier, we believe digitalisation has the potential to be one the most disruptive long-term, structural trends and one that will ultimately drive our economies into the future. In our view, companies which are unwilling or unable to manage this transition risk being left behind. By contrast, there is significant opportunity to be had for companies that are the innovators and disruptors, or who are creating solutions to some of the most pressing sustainability challenges we face as a global economy today. Digitalisation has a large role to play in creating new business models, changing others and facilitating the transition to a more sustainable operating model.
Companies recognise that integrating digitalisation can provide a competitive edge.
Nowhere to hide
We anticipate digitalisation will affect close to 90% of listed companies. From a market capitalisation perspective, we see a high degree of polarisation, between companies driving and implementing those changes and those at risk of disruption. Companies that are leading or embracing digitalisation stand to gain both a competitive advantage and a greater market share. From an investment standpoint, it is therefore imperative to assess how well positioned companies are for the Digital Revolution. In our view, this is an important aspect of assessing the sustainability of a company over the long term.
Digitalisation - Market cap change of companies (MSCI World Index)
Source: LOIM, MSCI All World Index, as at 31 January 2019
Adapt or disappear
Adaptability is a big part of digitalisation. Companies recognise that integrating digitalisation can provide a competitive edge. This has commonly taken the form of moving online to enhancing sales and marketing, building in automation, investigating in ‘Big Data’, machine learning and artificial intelligence.
Digitalisation has the potential to be one the most disruptive long-term, structural trends and one that will ultimately drive our economies into the future.
However established these advancements may feel, it is unlikely their full potential has been realised yet. There is still a long way for the Digital Revolution to run. For example, the total market volume for online concessions is expected to grow from less than 500 million euros today to six billion euros in 2025, according to Goldman Sachs1.
Digitalisation has challenged all markets, although in varying ways. When analysed on a sector basis, it becomes clear how much further this trend has left to run. In the case of the information technology (IT) sector, for example, digitalisation has been a predominantly positive force. The ‘FAANG’ stocks (Facebook, Amazon, Apple, Netflix and Google2) have shown huge growth over the past decade, as they have established themselves within the consumer market. This is just the tip of the iceberg though. A raft of ‘enabling’ companies in software, semiconductor and semiconductor equipment are empowering digitalisation of the whole economy. In our view, future growth in machine learning, automation, and cloud technologies will continue to drive these and other companies further.
At the other end of the spectrum, financials is a highly disrupted sector. Globally, we have seen online and fintech companies revolutionise the way we buy, sell and access banking information. Consumer bricks-and-mortar banks have been slow at embracing technology and will continue to lose their share of the market. Large banks that are able to effectively react to disruption should be less impacted by these sectoral pressures.
Source: LOIM, MSCI All World Index, as at 31 January 2019. Allocations are subject to change.
MSCI World Index sector review – Digitalisation impact
Source: LOIM, MSCI All World Index, as at 31 January 2019.
Digitalisation is a disruptive force that will continue to impact every company in every sector across the globe. In our view, the investment process needs to reflect this ever-changing reality by identifying companies that are well placed to benefit from the trend. Will it be a first mover, will it be an innovator or disruptor, or could it be a casualty of the transition to a more sustainable economy? We think, this is an important factor in delivering sustainable returns over the long term.
Sources
1 Source: Goldman Sachs Global Investment Research, March 2018.
2 Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities. It should not be assumed that the recommendations made in the future will be profitable or will equal the performance of the securities discussed in this document
important information.
This document has been issued by Lombard Odier Funds (Europe) S.A. a Luxembourg based public limited company (SA), having its registered office at 291, route d’Arlon, L-1150 Luxembourg, authorized and regulated by the CSSF as a Management Company within the meaning of EU Directive 2009/65/EC, as amended.
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