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European equities: accelerating the digital revolution

The coronavirus crisis has fast-tracked the global economy’s digital transition, as the pandemic has encouraged the uptake of virtual solutions across different industries. A core aspect of our European Equity team’s approach is its focus on unrecognised and enduring change, and we see a plethora of opportunities to seek out disruptive companies that are well-placed to succeed in a digitalised world.

Dialling up: digitalisation takes off

“Historically, pandemics have forced humans to break with the past and imagine their world anew. This one is no different. It is a portal, a gateway between one world and the next” 

 

Arundhati Roy, a novelist, writing in the FT in April 2020

Companies have long grappled with the challenge of adapting to an increasingly digital environment. The coronavirus pandemic has caused widespread disruption and has accelerated this digitalisation of the global economy, as almost all industries have been forced to adopt virtual solutions. As the CEO of Intel, Bob Swan, pointed out in a letter to customers, “we are witnessing what will surely be remembered as a historic deployment of remote work and digital access to services across every domain”.1

In alarmingly short order, the pandemic forced a wide variety of companies to move online – with varying degrees of success. Remote working surged as countries went into lockdown and data from McKinsey show that digital adoption advanced by five years in roughly eight weeks,2 although it varies across industries (see figure 1).

Figure 1. Digitalisation in the US across industries

Source: McKinsey COVID-19 US Digital Sentiment Survey, as at April 2020.

It remains to be seen whether companies will return to their pre-crisis ways of operating. Some sectors – particularly the hospitality and travel industries – certainly hope so. Yet while humanity’s need for social contact should ensure some return to normality, there is also a sense that the crisis signals a paradigm shift for how businesses and individuals operate. The companies that manage to survive – and indeed thrive – are those with business models that are flexible enough to adapt to the fast-digitalising landscape.

Our European Equity strategies take a long-term, high conviction approach to investing, with a focus on unrecognised and enduring change. This change is frequently attached to structural trends, the scale and duration of which is often underestimated, which provide a rich seam of attractive, long-term investment opportunities. We see the adoption of digitally focused business models as an opportunity and are currently invested in a number of companies that are set to benefit from this trend.

Semiconductors: enabling the digital transition 

The pandemic has triggered a significant rise in demand for cloud computing and data providers. One such company is ASML, a semiconductor industry supplier, which we hold across all of our European Equity strategies. The firm has become a linchpin for the global tech sector through its position as the sole manufacturer of extreme ultraviolet technology, which enables chip makers to reduce the size and increase the power and functionality of semiconductors.

Semiconductors play a key role in powering a variety of structural trends, including artificial intelligence (AI) and automation. According to a survey by Bain & Company, a management consultancy, three-quarters of the companies they surveyed plan to accelerate automation initiatives in response to the pandemic.3

ASML has the potential to play a vital, albeit hidden role in this revolution. In order to be effective, AI and automation – and other areas such as the internet of things and 5G – require vast amounts of data. ASML is well-positioned to provide the technology that will help semiconductor manufacturers make chips that facilitate the requirement for ever-expanding amounts of data.

Digital transactions: cash is no longer king

Meanwhile, the use of physical cash or cheques has been actively discouraged during the crisis. This has forced some companies to go cashless, resulting in a notable fall in cash volumes (see figure 2).

Figure 2. ATM transactions decline

Source: Link, as at August 2020.

There are also reasons to believe that the use of digital or contactless transactions will accelerate when the pandemic has eased.  Aside from the obvious hygiene benefits, going digital avoids time-consuming trips to the cash machine and lets firms incorporate payments seamlessly into their accounting systems.

Adyen, a holding we recently added to our Europe ex-UK, Sustainable Europe and Eurozone strategies, is an Amsterdam-listed, global payments processor that looks well placed to take advantage of the digitalisation of transactions and an expected growth in online sales.

The firm has a technology focused culture, providing comprehensive payment solutions to some of the most demanding and fast-growing merchants. With a negligible customer churn, it has consistently siphoned away market share from other payments processors. Moreover, its client mix is disproportionately exposed to ecommerce, a fast-growing area of payments which has benefited from a coronavirus-related boost.

The company’s success is in part due to the fact that it runs everything on a single, internally developed software platform. Eschewing growth through mergers and acquisitions, Adyen has an advantage over its competitors, which mainly rely on disparate, aged systems that originated 20-30 years ago in banks. These firms are unable to match Adyen’s structure, speed of innovation, pricing or technical features, which means it has the potential to make further gains in market share as the pandemic accelerates the shift towards a cashless society.

Supply chains: streamlined solutions 

The crisis has also brought into sharp focus the world’s reliance on glo