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Digital economy

Over the past few years, I have discussed at length the potentially compelling long-term investment opportunity in financial technology (“fintech”) — which we define as companies creating or leveraging technology to disrupt traditional financial services. While much of our internal dialogue has focused specifically on the fast-growing digital payments space, I’d also like to share my thoughts on the fintech industry more broadly and what the increasing relevance of its products means for traditional financial services.

In future blog posts, I will explore some of the below points in more detail for investors who want a deeper dive. For now, the main takeaways I want to leave you with are…

THEMES
Matt Ross
CFA
Global Industry Analyst
Boston

Several of my 2020 blog posts have explored China’s thriving innovation ecosystem and rapid transition to a digital economy — a hugely important investment theme for sure, but I’d like to shift gears this time to the subject of Chinese debt and domestic consumption.

Our internal investor dialogue around China has raised a number of provocative questions. One of the best ones asked recently was: Will rising debt ultimately derail Chinese consumption? The short answer, in my view, is no.

On the topic of debt, some of my colleagues have studied China’s consumer debt and concluded that the pace at which it is growing looks unsustainable in the long term. I tend to…

MACRO
THEMES
Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

I won’t spill much ink here trying to convince you that China is indeed “doubling down” on digitization and on its commitment to becoming a digital economy. You probably already know that, as do many other investors. And I’ve discussed it at length elsewhere, including in a few of my blog posts earlier this year:

We know also that many Chinese logistics companies, automation firms, software-as-a-service (SaaS) providers, and others are likely to benefit from China’s “enthusiastic plunge into a digital economy,” as I’ve described it. Whether or not some of these investment opportunities are already priced in is…

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong
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In my April 2020 blog, “Where to buy the future,” I encouraged investors to consider buying well-positioned technology companies at potentially bargain-basement prices. With two-thirds of the year now behind us, I’d like to share my latest thinking on the e-commerce industry in the wake of its (unsurprisingly) lights-out performance amid COVID-19-induced fears and economic shutdowns.

Broadly speaking, I think e-commerce names should continue to post solid sales growth through 2020, but then fall short of analysts’ and investors’ expectations in 2021. And for this to be the case, I don’t necessarily think…

THEMES

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Brian Barbetta
Brian Barbetta
Global Industry Analyst
Boston

In my last blog post, I discussed how China’s enthusiastic plunge into a digital economy is unleashing massive changes that are reshaping Chinese society and, along the way, creating a bounty of investment opportunities. Rapid digitalization, however, is only one of the forces driving this transformation. Even more potent change is occurring on the back of China’s 40-year-old, now-flourishing “innovation ecosystem.”

Lay of the landscape

Innovation is the advent of new ideas, technologies, business models, and products/services (Figure 1). Over the past 40 years of China’s transition to a market-driven economy, the conditions slowly developed for a vibrant innovation ecosystem to take root. The critical elements of this ecosystem — human capital, technical and experiential knowledge, and the institutions and incentives to promote an innovative culture — are relatively new in China, having only emerged over the past decade or so. (Before then, most “new” things that appeared in China were adaptations or copies of existing things.)

Figure 1

Innovation results in rising complexity and sophistication of the economy

Thus, the ecosystem has only recently become truly “innovative” and is just starting to produce meaningful results — a tsunami of new…

MACRO

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

In my last blog post, I likened the US-China digital competition to an arms race of sorts — albeit (fortunately) without the imminent threat of military aggression. I posed the provocative question, “The future is digital, who will get there first — the US or China?” We don’t know the answer yet of course, but if it isn’t the Chinese, it certainly won’t be for a lack of trying on their part. China has enthusiastically embraced the inexorable shift toward a digital global economy.

US vs China: An economic cold war

I also noted in my previous post that, in the not-too-distant future, a country’s level of digitalization will be synonymous with its level of economic advancement. That’s what makes technology so valuable and so worth fighting for. Just as resources like oil have created conflict between nations in the past, so access to and control over digital resources is now creating conflict between the US and China. It’s an economic cold war, and both countries are…

MACRO

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Santiago Millan headshot
Santiago Millán
CFA
Macro Strategist
Hong Kong

US-China relations were already bad and getting worse before the COVID-19 outbreak. The pandemic and its economic effects have only accelerated the deterioration of the relationship. In the US, a growing cohort is calling for a post-pandemic decoupling from China.

What should investors do? Prepare for disruption across the global economy as more and more sectors and industries become geopolitically sensitive, with technology topping that list. At some point, nations may no longer be distinguished by their state of economic development, but rather by their level of digitalization (or at least those will become synonymous).

Which brings us back to the US and China, the world’s two superpowers. Their global domination extends to today’s digital economy, as shown in…

MACRO

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Santiago Millán
CFA
Macro Strategist
Hong Kong
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