In challenging environments, top-down secular themes provide “a wind in the sails” that can help companies stay above the economy. As we have discussed in our recent conference call series for financial advisors and in a number of our team’s past posts, our approach focuses on combining top-down themes with bottom-up analysis. Businesses that are positioned to benefit from these themes can provide excellent secular growth opportunities, along with the potential for resilience during more volatile markets.
In this post, we’ll revisit three themes that we’ve been bullish on for quite some time: Bioprocessing, artificial intelligence, and global payments. While growth prospects for these themes was strong coming into this crisis, we would expect the rate of disruption and opportunity to only increase as we move through these uncertain times.
Sam Schuette, Research Analyst, International Health Care
The bioprocessing industry is well positioned to benefit as the health care industry seeks a vaccine and treatments to combat Covid-19. Bioprocessing companies are in a position to supply tools and manufacture both drugs and vaccines. They are not tied to the success of any one company, but benefit broadly from the development of treatments.
In our post from October of 2019, “Global Growth Themes: The Opportunity of Bioprocessing,” we provided an overview of the industry and identified three themes that we saw driving opportunity: volume, outsourcing and manufacturing. All three should gain traction as the fight against the coronavirus continues.
Volume. We expect volume to grow for biologics as vaccines are being developed to improve the immune system’s ability to recognize and fight the virus.
Outsourcing. Biotech and pharma companies have relied on outsourcing, including to contract development and manufacturing organizations (CDMOs), including companies in bioprocessing. We expect the outsourcing rate to increase as small biotechnology companies partner with CDMOs to produce therapies in a fast and cost effective manner.
Manufacturing. We also expect manufacturing to continue moving toward single-use technology, which is more flexible for new biologic development.
Nick Niziolek, CFA, Co-CIO, Head of International and Global Strategies
In 2018, our team wrote about China’s expansive development of and investment in AI and Big Data analysis. The coronavirus has now brought China’s use of AI and Big Data to the forefront, and we’ve also seen Korea emerging as well. Both countries have instituted testing on a very large scale, but their AI and Big Data capabilities—along with a willingness to use those tools—have played a great role, too.
Korea has developed an app and a website maintained by the government that uses phone activity to track tens of thousands of quarantined residents. Their phones can alert authorities if they leave their homes and also show their movements before being quarantined. Citizens get routine text messages about cases developing in their neighborhoods as well. Names are not used, but demographic data is displayed.
China is taking many similar measures although to an even more drastic level. Phones have QR codes where they are assigned a green, yellow, or red virus indicator, and phones are inspected at the entrance of public places. These have been developed by private internet conglomerates, but in close concert with the government. Individuals can log into an app, type their name and ID and quickly be told of risk from recent contacts. Thermal scanners have been installed at train stations and telecom providers get precise records of user itineraries. Drones have even been used, equipped with speakers to direct anyone socializing outside toward indoors. From a pure technological advancement standpoint, there have reports of testing being done by AI companies in China on tools that allow thermal cameras to detect temperatures and facial recognition with masks on.
Both China and Korea are not out of the woods yet in regards to the coronavirus and face the risk of a second wave like any other country. However, in terms of the severity of measures taken and the capabilities available to force quarantine, they appear to be among the most advanced countries. In our opinion, this gives them greater likelihood of returning to economic normalcy the fastest. We wrote about opportunities in international tech in January, and all reports indicate that China has not lost any focus on 5G capex and its desire to lead in that area. The global coronavirus pandemic could potentially even widen the gap relative to the rest of the world in terms of the speed that they reach those goals.
Alex Wolf, CFA, Senior Research Analyst, International Financials
Last September, we published “Opportunities in Disruption: Finding Growth Opportunities in the Payments Ecosystem,” a post we expanded further in November after attending an industry conference. Companies in the ecosystem will take a hit in the short term from reduced economic activity, especially those exposed to travel and retail. Over the medium to long term, we believe this theme is still very much in place.
The types of companies we have discussed in the past—those that are enabling merchants to move online, and drivers of ecommerce and digital transactions—will continue to benefit. As people are forced to stay home for extended periods, the gradual move to digital and electronic transactions will likely accelerate. Any companies within the acquiring space taking excess merchant risk may struggle to get through this difficult period. However, the best-in-class innovators that are well set up to serve their customers navigating fintech journeys will weather this storm well, and set themselves up for an attractive long term outlook.
As investment managers, we are focused on actively managing our portfolios to capitalize on the long-term opportunities that are borne out of short-term price dislocations. Our team is using volatility to add to favorite names that we believe have been oversold, including in companies tied to secular growth themes we’ve outlined above.
Opinions, estimates, forecasts, and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. The views and strategies described may not be suitable for all investors. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations.
As a result of political or economic instability in foreign countries, there can be special risks associated with investing in foreign securities, including fluctuations in currency exchange rates, increased price volatility and difficulty obtaining information. In addition, emerging markets may present additional risk due to potential for greater economic and political instability in less developed countries.
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