Malcolm Schembri, manager of the Garraway Global Equity fund, explains why technology stocks are not the only game in town when it comes to picking winners.
The dominance of the pandemic-accelerated, tech revolution narrative is leading investors to think it’s the only game in town.
As populations have increasingly embraced technology during the coronavirus lockdown to buy things and communicate with each other, the monumental stock market gains made by Facebook, Apple, Amazon, Netflix and Google make perfect sense.
And their increasing ongoing dominance in their respective markets means investors will do well to keep exposure to such type of names.
It’s perhaps why some global equity funds appear to have morphed into technology funds.
But this obsession with these pure tech plays ignores many high-quality, traditional companies, a large number of which have leaned on technology to enhance their existing business models.
The high level of uncertainty investors have about bricks & mortar-based businesses is understandable, not least due to ongoing fears about the coronavirus.
Yet what kills others makes the strong even stronger.
Socialising is a basic human need and will return with a vengeance once the pandemic subsides. The companies most likely to prosper first will be large, established brands that harness digital means to communicate and transact with their customers.
Starbucks is one such business. While the company is under-earning at present, the long-term picture remains bright.
It possesses one of the most sought-after loyalty apps and boasted 16 million active users in March last year. The app makes online ordering and payment easy, something which was already gaining traction before the pandemic, and will most certainly remain important for consumers in the post-coronavirus world.
Digitally engaged customers spend around twice as much as non-digitally engaged clients.
Added to this, coffee consumption has a huge growth trajectory in countries with emerging middle classes. In China, coffee consumption has grown massively over this past decade. Yet the average person in China still drinks a mere seven cups a year compared to 250 in the UK. There is a clear potential for revenues to grow materially over time.
Also, particularly within China, Starbucks coffee shops are highly lucrative and the thousands of sites the company is planning on opening should serve shareholders very well.
Beauty is in the eye of the shareholder
Elsewhere, Estee Lauder, one of the world’s leading cosmetics manufacturers suffered on two fronts during the pandemic.
Its large physical store presence in the US proved painful during lockdown, while its reliance on duty-free sales at airports plunged as global aviation came to a standstill.
Yet Estee Lauder’s strong brands and digital channels led to a monumental shift. Its online presence nearly doubled to reach 40 per cent of revenue. This has not mitigated the decrease in store and airport sales entirely, but the shift will be accretive to the firm’s margins as it is more profitable for Estee Lauder to sell online than in stores.
Notwithstanding the disruptions, in mainland China, net sales grew by double digits. By achieving double-digit growth in every product category and nearly every brand, as well as in every channel China is already leading the recovery and will continue to fuel growth in the years ahead.
Estee Lauder is uniquely positioned to continue to win market share, as it has done during the pandemic. It is the only major cosmetics company which is focused on prestige brands. Roughly half of its revenue and the bulk of its profits are generated from skincare. Skincare and prestige beauty are amongst the fastest growing market segments within cosmetics. The company’s 80 per cent gross margins illustrate just how much consumers are ready to pay for brands such as La Mer, Estee Lauder and M•A•C.
Finally, the average person in South Korea spends $276 annually on prestige beauty products, while in China the figure is $23. The disparity between these two indicates China’s runaway growth ahead.
These two examples suggest that traditional businesses, enhanced by technology, can be compelling investments and that Silicon Valley shouldn’t steal the show entirely for investors.
Besides which, a Global equity fund should not be a tech fund in all but name.
This article first appeared on Trustnet.