Tech is the New Macro

Tech is the New Macro

We have entered a new Digital Age where the rapid expansion and implementation of technological innovation has become a key factor in the behavior of the economy and capital markets. This new era is marked by the transition from “atoms” to “bits,” resulting in a capital-light economy in which technology is being substituted for labor and physical assets. Fueling this transformation is data, an imperative resource and what we have labeled as the “new oil.” We have written extensively on this topic and the implications for business and investors in the years to come.

“What is your business strategy in the digital age?” has become one of our favorite questions to ask management teams.
If a company cannot provide a convincing response, we believe it will likely flounder and ultimately disappear.
– William Priest, Executive Chairman, Co-CIO and Portfolio Manager

Presentation – November 2, 2021   White Paper – September 21, 2021  
From ‘Atoms’ to ‘Bits’ –
Turbo-Charging the Digital Economy		   The Pandemic Accelerant Part II:
Turbo-Charging the Digital Economy		  
   
Epoch’s Global Strategist, Kevin Hebner, talks about the pandemic and its acceleration of the digital economy. He also presents China’s changing regulatory environment, the impact of “common prosperity” on equity markets and our outlook on inflation. The recent surge in start-ups and unicorns reflects the broadening of the digital revolution across industries, and suggests improving productivity and free cash flow. Further, although the digitization of the economy is still in early earnings, we expect digital platforms to represent the majority of market cap by 2025, with tech, health care and communications the most promising sectors.  
       
Insight – March 24, 2021   Insight – February 11, 2021  
Money 3.0: Central Bank Digital Currencies (CBDC)   Moore’s Law & the Race for the Rest of the Chessboard  
   
During the past two years, CBDC has progressed from a bold speculative concept to a seeming inevitability and core feature of our financial ecosystem. This paper explores the potential disintermediation of significant swaths of the commercial banking system.   Both sides of the political spectrum are pushing for regulatory action of Big Tech. We explain why tech will continue to be the most dynamic sector of the economy, and why we expect greater breadth in tech market leadership.  
       
White Paper – January 22, 2021   White Paper – August 19, 2020  
Will Biden Take On the Tech Barons?   The Pandemic Accelerant: Digital Age Business Strategies  
   
The Cambrian explosion of exciting breakthroughs in AI, autonomous driving, 5G, and cloud computing will drive double-digit growth in semiconductor revenues for the foreseeable future. We have a constructive view on the semiconductor sector and believe it possesses considerable upside.   The last six months have been profoundly transformational, with the COVID shock acting as an accelerant for the digitization of the economy.  
       
White Paper – January 31, 2018   White Paper – June 19, 2019  
When “Bits” Meet “Atoms” Blitzscale and Hope: Unicorns, IPOs And The Fear of Repeating the Late 1990s  
 
The Digital Age and the transition from “atoms” to “bits” implies a capital-light economy in which technology is being substituted for labor and physical assets. Its impact is widespread and stretches beyond the technology sector.    The current hype about two-sided digital platforms, blitzscaling and winner-takes-most markets has fueled a surge in IPO listings and produced stratospheric valuations that are difficult to reconcile with free-cash-flow (FCF) fundamentals.   
     
White Paper – August 10, 2017   Insight – December 10, 2018  
Tech is the New Macro – Part II: Implications For Labor Markets And Productivity Trump, Tech and Trade
   

The rapid expansion and implementation of technological innovation has become a key factor in the behavior of the economy and capital markets. In this paper we explore how platforms and their network effects have resulted in a winner-takes-all market.

   China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat.  
       
White Paper – June 29, 2017   Insight – September 13, 2018  
Tech is the New Macro – Part I: Impacting All Three Components of Return on Equity Is e-Commerce a Bubble?
   
The rapid expansion and implementation of technological innovation has become a key factor in the behavior of the economy and capital markets.   While the e-Commerce index as a whole appears frothy, many companies in the sector do possess sound and promising business models. For investors, the key to success is understanding how these business models should be valued.  
       

Our Perspectives

The recent surge in start-ups and unicorns reflects the broadening of the digital revolution across industries, and suggests improving productivity and free cash flow. Further, although the digitization of the economy is still in early earnings, we expect digital platforms to represent the majority of market cap by 2025, with tech, health care and communications the most promising sectors.

Inflation risks are at a four-decade high due to today’s combination of a generous Treasury, an overly tolerant Fed, and a reopening economy. While our base-case scenario assumes only a brief period of above-target inflation, investors should brace themselves for more inflation scares, which will likely remain a key driver of equity markets well into 2022.

During the past two years, CBDC has progressed from a bold speculative concept to a seeming inevitability and will soon be a core feature of our financial ecosystem. The rollout of CBDCs will further accelerate the digitization of the economy, which is the key defining feature of markets over the past decade. This paper explores the implications for monetary policy, the FinTech and payments sectors, and the potential disintermediation of significant swaths of the commercial banking system.

The Cambrian explosion of exciting breakthroughs in AI, autonomous driving, 5G, and cloud computing will drive double-digit growth in semiconductor revenues for the foreseeable future. Superstar firms have come to dominate all subsectors of the increasingly concentrated semiconductor industry, which implies pricing power and explains the sector’s attractive operating margins and return on capital. Valuations are reasonable, and we have a constructive view on the semiconductor sector and believe it possesses considerable upside.

Both sides of the political spectrum have been increasing their calls for regulatory action on the Big Tech companies. Here we explain why tech will continue to be the most dynamic sector of the economy, and why we expect greater breadth in tech market leadership and the emergence of entirely new sub-sectors.

More than just our proprietary stock selection model, the Epoch Core Model (ECM) is a rules-based expression of Epoch’s free cash flow investment philosophy. Learn more about the components that make up the ECM and how it’s being used to enhance the firm’s investment processes across strategies, to surface ideas for further research, to prioritize our research queue, and to inform our portfolio construction process.

In understanding the performance of any investment strategy, it is important to pay attention to how real economic events drove that performance, rather than fall back on a set of abstract  factor returns as if they were somehow responsible.

The last six months have been profoundly transformational, with the COVID shock acting as an accelerant for the digitization of the economy. This radical transition is especially advantageous for asset-light business models. All companies will be acutely affected, although the biggest winners are platforms, with their economies of scale and low marginal costs.