Investing in the digital economy

Investment Theme
hansoudshoorn
Hans Oudshoorn

Summary:  The digital world is taking off. More and more investors are investing in this area. But how can you do this yourself and what should you pay attention to?


Level: Any experience


With the global spread of the internet (according to Cybersecurity Ventures, an estimated 6 billion people will be online by 2022) we not only share our joys and sorrows online, but also have the whole world at our fingertips via our PC or smart phone. Whether buying clothes online or trading on the exchange market, people's behaviours are becoming ever more digital and more companies are offering their services and products online.

I have also noticed that the coronavirus seems to have accelerated the digitalisation of the world. The requirement to work from home not only saves travelling time, but also brings technology to the forefront by ensuring that meetings take place via online platforms such as Microsoft Teams. And what about groceries ordered via the internet? It has become so popular, there are waiting lines for delivery!

Restaurants are also increasingly offering their menus digitally for takeaway or delivery. E-health is also on the rise: online treatment programs within healthcare (including mental health care). A while ago, I even had my first blind beer tasting via the World Wide Web. The opportunities were already plentiful, but social distancing and the "one and a half meters economy" seem to be a breeding ground for new online initiatives and accelerators of existing ones.

In a previous article, I discussed the importance of cyber security and the opportunities for investing in it. Now that the coronavirus—despite the introduction of effective vaccines—is further fuelling the digital economy, and with the opportunities for investment within the digitalisation sector or the "digital economy" in mind, I would like to give you a head start with this article.

From digitisation to the digital economy

Digitisation is the transition from analogue information—paper books, audio and film on tape, and so on—to a form that can be used by computers. Digitisation can relate to the data itself as well, such as scanning documents for online use (going from paper road maps to modern navigation systems) or the use of digital photography.

It can also be about procedures (such as the digital submission of notarial deeds to the land registry instead of the old-fashioned paper ones) or the impact on society in general (from the increasing use of digital information and devices).

And the bridge to the digital economy? Digitisation and the ease with which connections can now be made to other businesses or information systems—also known as connectivity—have permanently changed the way people communicate and the way companies do business. Along with the increased connectivity, digitisation has changed the way markets and economies function. In other words, digitisation has affected all aspects of traditional markets, on both the demand and supply sides of the economy.

The Economics of Digital article by PwC Netherlands' Europe Monitor outlines this—loosely translated—as follows: On the demand side, the influence of consumers is no longer limited to purchasing decisions. They can now also participate in all stages of the production of goods: from ideas and design to crowdfunding and production, for example, by using cheaper prototypes based on 3D printing. In short, don't just buy a dark blue chair, but also choose the upholstery and decide what wood the chair should be made from.

On the supply side, companies have evolved from serving the masses as efficiently as possible to—as far as feasible—fully automated customised and real-time solutions. By harnessing the power of data and advanced algorithms (smart arithmetic), companies today can reach their target consumers at the desired moment, using the right sales message.

Actually, there is no single definition for the digital economy. Nowadays, it is increasingly seen as "doing business through internet-based markets". For this reason, it is also called the "internet economy" or the "new economy". Sometimes the English term "Web economy" is used.

Although the internet plays an important role, the digital economy is more than that. In an interview, Corina Kuiper, associate professor at Business School Netherlands and founder of the Innovation Family, gave the following interpretation of the term: Digital economy connects everything with everything, data with data, data with people and people with people. In other words, it's about always being online, robotising, analysing data and using data to connect things and people.

Digital economy: growth ahead?

Companies that want to be successful in the digital economy also offer their services and/or sell products via the internet. Companies that traditionally only had physical shops, such as Ahold Delhaize's supermarkets and McDonald's fast food restaurants, are now adopting a "clicks and bricks" strategy. In other words, in addition to physical shops (bricks), they have a good online strategy (clicks) where the customer can order via a website and have the food delivered to his/her home. But there is still a world to be conquered for many companies. A major OECD study states that in 2017, 95% of the companies within the scope of the international organisation had a broadband internet connection, but only 23% of them had an ecommerce strategy.

Researcher and think tank Oxford Economics calculated in their study "Digital Spillover" that the digital economy in 2016 amounted to USD 11.5 trillion, or 15.5% of the total GDP worldwide. That percentage that is estimated to rise to 24.3% in 2025, equivalent to some USD 23 trillion. In short, there is an expected robust growth for the digital economy involving staggering amounts of money. Incidentally, the study was published before the world had to deal with the coronavirus. Perhaps the current situation will give a boost to the growth trend of the digital economy.

Investing in the digital economy?

The expected growth of the digital economy and the related development and implementation of online sales strategies means more demand for and increased spending on IT/ICT services and products. You could of course buy Dutch ICT shares from Ctac or ICT Group, or shares from the American "tech classic" Microsoft or relative newcomer Slack. However, investing in individual shares is generally riskier than investing in a diversified portfolio through, for example, a mutual fund or ETF.

As the sector is at the beginning of its development, the supply of investment funds and ETFs (for individuals) is not great yet. During my search, I came across two investment funds that may help capitalise on the expected growth of the digital economy: the iShares Digitalisation UCITS ETF (ISIN IE00BYZK4883) and the Pictet - Digital - I - Acc fund (ISIN LU0340554673).

Before I zoom in any further, I'll add a comment. Regular readers know that I always discuss two investment funds side by side. This time, however, the iShares ETF falls short: although it follows the benchmark except for friction costs, it scores only 2 stars with Morningstar. Risk and return, relative to similar investments within the digital economy category, are not fully balanced for this fund.

Fortunately, Swiss Pictet has traditionally had a good eye for "tomorrow's markets". The fund has 60 stocks in its portfolio, including Baidu, Salesforce.com and Intuit. It is quoted in euros and is tradable in SaxoInvestor via FundSettle.

The fund has the MSCI ACWI Euro as its reference index. Since its inception on 30 June 2008, the fund (14.16% p.a.) has been able to achieve better returns, in the form of price gains and dividends, than this index (7.29% p.a.). The fund therefore scores very well with Morningstar: four stars. The dividend, about 0.5–0.75% per year, is automatically reinvested. Current costs are 1.16%: defensible, given the good performance.

The value of your investment may fluctuate.

As a bonus, the fund invests in stocks that score well on corporate sustainability and have a smaller CO2 footprint than its sector peers. Overall, the fund receives three globes for the Morningstar Sustainability Rating™.

In terms of investing like a football coach, it is a midfielder with a sense of attack.

In a nutshell, the Pictet fund is interesting for long-term investors who can and want to bear equity risk, who want to add nuance to their portfolios with companies that are driving the development of the digital economy, and who want to focus on sustainability.

Would you like to know more? Read about the Pictet fund.

Investing carries risks. Your investment may depreciate.

Quarterly Outlook

01 /

  • Macro Outlook: The US rate cut cycle has begun

    Quarterly Outlook

    Macro Outlook: The US rate cut cycle has begun

    Peter Garnry

    Chief Investment Strategist

    The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c...
  • Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Quarterly Outlook

    Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges

    Althea Spinozzi

    Head of Fixed Income Strategy

  • Equity Outlook: Will lower rates lift all boats in equities?

    Quarterly Outlook

    Equity Outlook: Will lower rates lift all boats in equities?

    Peter Garnry

    Chief Investment Strategist

    After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto...
  • FX Outlook: USD in limbo amid political and policy jitters

    Quarterly Outlook

    FX Outlook: USD in limbo amid political and policy jitters

    Charu Chanana

    Head of FX Strategy

    As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...
  • Commodity Outlook: Gold and silver continue to shine bright

    Quarterly Outlook

    Commodity Outlook: Gold and silver continue to shine bright

    Ole Hansen

    Head of Commodity Strategy

  • FX: Risk-on currencies to surge against havens

    Quarterly Outlook

    FX: Risk-on currencies to surge against havens

    Charu Chanana

    Head of FX Strategy

    Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo...
  • Equities: Are we blowing bubbles again

    Quarterly Outlook

    Equities: Are we blowing bubbles again

    Peter Garnry

    Chief Investment Strategist

    Explore key trends and opportunities in European equities and electrification theme as market dynami...
  • Macro: Sandcastle economics

    Quarterly Outlook

    Macro: Sandcastle economics

    Peter Garnry

    Chief Investment Strategist

    Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p...
  • Bonds: What to do until inflation stabilises

    Quarterly Outlook

    Bonds: What to do until inflation stabilises

    Althea Spinozzi

    Head of Fixed Income Strategy

    Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ...
  • Commodities: Energy and grains in focus as metals pause

    Quarterly Outlook

    Commodities: Energy and grains in focus as metals pause

    Ole Hansen

    Head of Commodity Strategy

    Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...

Disclaimer

The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
Full disclaimer (https://www.home.saxo/legal/disclaimer/saxo-disclaimer)

Saxo Bank A/S (Headquarters)
Philip Heymans Alle 15
2900
Hellerup
Denmark

Contact Saxo

Select region

International
International

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

This website can be accessed worldwide however the information on the website is related to Saxo Bank A/S and is not specific to any entity of Saxo Bank Group. All clients will directly engage with Saxo Bank A/S and all client agreements will be entered into with Saxo Bank A/S and thus governed by Danish Law.

Apple and the Apple logo are trademarks of Apple Inc, registered in the US and other countries and regions. App Store is a service mark of Apple Inc. Google Play and the Google Play logo are trademarks of Google LLC.