Impact Of The Digital Transformation On The Stock Market
Financial markets and management committees are talking about how digitisation is transforming our society and how companies have to adapt.
After a major impact, often widely covered in the media, on specific sectors such as the hotel industry impacted by the arrival of Airbnb, and taxis by that of Uber, digitisation is now moving toward a more fundamental transformation of our economy.
Traditional business is under pressure following the massive growth of e-commerce:
- Food retailers are highly concerned about the arrival of Amazon into their market (further to its acquisition of Whole Foods);
- Banks are worried that their market share will be eaten up by the Fintechs;
- The media must adapt the services they offer;
- Car manufacturers are seeing their industry develop in response to innovations made by technology giants and the resulting changes in customer behaviour.
In short, many industry players are concerned by this digital disruption, a lot more it seems than just hotel owners and taxi drivers.
These technological innovations are known as “disruptive”. They imply a dislocation of the existing model and therefore disturb the markets of traditional businesses. Joseph Schumpeter already postulated this concept in the last century when he spoke about creative destruction.
At the current stage, how has the stock market integrated the impacts of these disruptive technologies?
THE BIG WINNERS
As it appears quite obvious today, the big winners are the tech stocks, in particular, the famous “FAANG” (Facebook, Apple, Amazon, Netflix, and Google). These five companies by themselves represent over 10% of the S&P500’s market capitalisation and nearly 25% of its performance since the start of the year. Tech stocks as a whole are responsible for nearly half of the S&P500's performance since the start of the year. The enthusiasm is powerful, frequently justified by ever-increasing earnings, but today's sector valuations can be of concern as they seem relatively overvalued (on this point, see: Are US Equities Really Overvalued?). The growth potential of tech stocks seems more limited today.
THE BIG LOSERS
It is less talked about, but digitisation has already created a few victims for which the technological revolution is bringing lasting pressure to bear on their future profitability. Within the S&P500, two categories of companies stand out by their miserable performance. Firstly, certain activities linked to end consumers (shops, department stores, media, and food retail) have been punished, emphasising the lack of investor confidence in their business model. While most industries are currently at the top of their earnings cycle and are trading at their highs, the mark-down applied to these activities suggests that investors have already integrated the negative effects of digitisation.
Secondly, the markets also abandoned oil and gas stocks. Here too, the emergence of a new technology - shale gas - explains the difficulties being faced by the sector, however these are totally unrelated to the digitisation of the economy.
AND, TO DATE, MANY ARE RESISTING
For other sectors, investors at this stage do not appear to be genuinely concerned about the disruption being caused by the economy's digitisation. The digital wave will not necessarily be a tsunami for all businesses. Some are capable of adapting to the new environment and thus able to resist. They can change their operating methods and refocus their strategy. In particular, they can grow their e-commerce business and integrate new technology tools. Moreover, certain business sectors are protected by financial or regulatory barriers to entry that are often difficult to overcome for new entrants. For example, industrial activities entail high fixed costs. Healthcare and the financial sector are strictly regulated.
The digitisation of the economy will apparently not have such devastating effects for everyone, but perhaps it is just a matter of time...