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Digital transformation – the driving force of technology

Issue date: 2020-12-31

By Franklin Templeton 

  • COVID-19 has accelerated technology sector’s leading position in digital transformation. At the same time, leaders in digital transformation are more agile than their peers. They can plan faster, serve their customers better and hence become competitive.
  • During the pandemic, social distancing measures are compelling consumers, students and businesses to embrace digital platforms. We believe that many of the secular changes brought about by the COVID-19 crisis are structural and here to stay
  • Digital Transformation represents a multitrillion-dollar opportunity and will drive growth in the technology sector for the next decade.

2020 will be remembered as a period of tremendous disruption and change. A worldwide pandemic and contentious US presidential election contributed to volatility that affected economic growth and global markets. As we look forward to 2021, we are positive about continued economic recovery, although the markets still face the ongoing uncertainty of COVID-19. We believe declining rates of infection and progress toward development and distribution of a vaccine will determine the pace of US economic recovery and, in turn, spur economic growth in 2021.

Trends In a Low-Yield Environment

In a low growth, low interest-rate world, we believe investors will continue to look to global equity markets for attractive investment opportunities relative to other asset classes.  And the trends that have driven equity markets higher since the start of the pandemic, such as digital transformation and innovation in the technology, health care and consumer sectors, are set to continue. And there is evidence that the technology sector is more resilient than its peers.

Technology sector outperformed its peers during COVID-19 crisis
Relative S&P 500 Sector Performance Since the First Confirmed Covid-19 Infection1 
15 November 2019 – 31 October 2020

The world is waking to the Fourth Industrial Revolution, a time of massive change led by innovation, which the impact of the COVID-19 has accelerated. Examples of rapid industry shifts include work from anywhere, remote sports and entertainment, greater reliance on restaurant takeout and delivery services, increasing industry consolidations, supply chains returning domestically, and retailers moving exclusively online.

And we believe remote work and e-commerce will only become more entrenched over the coming decade, as technology companies continue to innovate and offer new tools to help manage this ongoing digital transformation. We would also expect any potential infrastructure bill from a new Congress and presidential administration to include some funds for areas of technology such as 5G and greater broadband access that could further underpin this digitization story.

We also want to highlight that the technology sector offers some of the highest-quality businesses and the best balance sheets across the broad S&P 500 Index it is one of the three sectors with net cash over the past three years (through October 2020).

Many Tech firms have become very profitable
Earnings-Per-Share S&P 500 Information Technology Index2
20-Year Period Ended 31 October 2020

Potential Risks to Consider

Markets will likely remain sensitive to advancements in COVID-19 treatment and the path to vaccine discovery. As we head into the final weeks of 2020, the key risks to monitor include the contentious US-China trade situation as new licensing restrictions was imposed, which creates incremental challenges for key suppliers across the semiconductor and semiconductor capital equipment industries. Technology regulation is another area of concern; in particular, investors need to pay close attention to US and European Union investigations into the business practices of key digital leaders.

Technology Sector is Well-Positioned In Today’s Market

We remain focused on the highest-quality businesses aligned strongly with the Digital Transformation theme and its associated sub-themes:

  • artificial intelligence (AI) and machine learning
  • cloud computing
  • data analytics
  • IoT (internet of things)
  • cybersecurity
  • software as a service (SaaS)
  • e-commerce
  • fintech and digital payments
  • customer insights
  • collaboration and workflow
  • DevOps (software development and IT operations)
  • 5G network communications and more.

In our view, Digital Transformation represents a multitrillion-dollar opportunity, one that we believe is still in its early days and will drive growth in the technology sector for the next 10 years.

1.Source: S&P Dow Jones Indices and Macrobond. Data as of 31 October 2020. Past performance is not an indicator nor a guarantee of future performance. Indices are unmanaged, and one cannot invest directly in an index.

2.Source for Earnings-Per-Share: © 2020 FactSet, 31 October 2020. Earnings-Per-Share is based on an estimate of Next-Twelve-Months (NTM). Copyright © 2020, S&P Dow Jones Indices LLC. All rights reserved. See www.franklintempletondatasources.com for additional data provider information. Past performance is no guarantee of future results. Indices are unmanaged, and one cannot invest directly in an index. Source for recessions: National Bureau of Economic Research.

Copyright © 2020. Franklin Templeton. All rights reserved.

Franklin Templeton Investments (Asia) Limited and Legg Mason Asset Management Hong Kong Limited are the issuers of this document. The comments, opinions, and estimates contained herein are based on or derived from publicly available information from sources that Franklin Templeton believes to be reliable. Franklin Templeton does not guarantee their accuracy. This document is for informational purposes only. Any views expressed are the views of respective portfolio management team of Franklin Templeton as of the date published and may differ from other portfolio management team/ investment affiliates or of the firm as a whole. The security provided (if any) is for illustration purpose only and is not necessary indicative of a portfolio's holding at any one time. It is not a recommendation to purchase, sell or hold any particular security. This document is not intended to provide investment advice. Investments involves risks. Where past performance is quoted, such figures are not indicative of future performance.

The underlying assumptions and these views are subject to change without notice. There is no guarantee that any forecasts expressed will be realized. Neither Franklin Templeton, its affiliates nor any officer or employee of Franklin Templeton accepts any liability whatsoever for any direct or indirect consequential loss arising from use of this document or any information, opinion or estimate herein. This document has not been reviewed by the Securities and Futures Commission of Hong Kong.

This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.|
Legg Mason Asset Management Hong Kong Limited is an indirect wholly owned subsidiary of Franklin Resources, Inc.
Franklin Templeton Investments (Asia) Limited
富蘭克林鄧普頓投資(亞洲)有限公司



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