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Investing in the digital economy

Written by Hans Oudshoorn | 5 minutes
SAT 16-05-2020

With the rise of the internet - according to the Cybersecurity Ventures company, an estimated 6 billion people will be online by 2022 - not only will we share joys and sorrows online, but the whole world is within reach via our PC or smartphone. Whether it concerns the online purchase of clothing or stock exchange trading, the fact is that more and more companies offer their services and products online.

The coronavirus seems to accelerate the digitization of the world. Compulsory working from home not only saves travel time but also ensures that meetings take place via online platforms such as Microsoft Teams. And what about groceries ordered via the internet? Queues for the delivery!

More and more restaurants are offering their menus digitally for take-away or delivery. Also, e-health is emerging: online treatment programs within (mental) health care. Recently I even had a blind beer tasting via the world wide web for the first time. The possibilities were already endless, but social distancing and the introduction of the 'one and a half meter economy' seem to be a breeding ground for new and accelerating existing online initiatives.

In an earlier article, I discussed the importance of cybersecurity (internet security) and the possibilities to invest in it. Now that the coronavirus is spreading further in the digital economy and with the questions I have recently received from investors about the investment opportunities within the sector 'digitization' or 'the digital economy', I want to give you support with this article.


From digitization to digital economy
Digitization is the transition from analog information - from a paper book or photo to audio and film material - to a form that can be used by computers. Digitization can relate to the data itself; from scanning documents for online use (from road maps to modern navigation systems) to using digital photography.

It may also concern procedures (the digital submission of notarial deeds to the land register instead of old-fashioned on paper) or the influence on society in general (increasing use of digital information and devices).

And the bridge to the digital economy? Digitalization and the ease with which connections can now be made to other business or information systems - also known as connectivity - have permanently changed the way people communicate and companies do business. And with that how markets and economies function. In other words, digitization has affected all aspects of traditional markets. Both on the demand and supply side of the economy.

PwC Nederland's' Europe Monitor - The Economics of Digital '- freely translated - outlines this 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 an idea and design to crowdfunding and the production through cheaper prototypes based on, for example, 3D printing. In short, not only buy a dark blue chair but also choose which upholstery you want and determine which wood the chair should be made of.

On the supply side, companies have evolved from serving the masses as efficiently as possible, too - where possible - fully automated customization and real-time solutions. By using the power of data and advanced algorithms (smart calculations), companies can now reach the intended consumer at the desired time, using the right sales message.

There is no clear definition of the digital economy. Today it is increasingly seen as "doing business through internet-based markets." For that reason, it is also called the 'internet economy' or the 'new economy'. Sometimes reference is made to the English term 'Web Economy'

While 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 to the term: 'Digital economy connects everything with everything, data with data, data with people and people amongst each other. In other words, it is always possible to be online, robotizing, analyzing data, and using this to connect things and people’.

Digital economy: growth ahead
Companies that want to be a successful part of the digital economy also offer their services and/or the sale of products via the internet. Companies that traditionally only had brick and mortar stores - such as Ahold Delhaize supermarkets and McDonald's restaurants - are now adopting a clicks and bricks strategy. In other words, in addition to physical stores (bricks), they have a good online strategy (clicks) where the customer can order via a website and have the groceries delivered at home. But there is still a world to be won by many companies. A large study by the OECD shows that in 2017 95% of the companies within the scope of the international organization had broadband (internet) connection, but only 23% had an e-commerce strategy.

In their study 'Digital Spillover', researcher Oxford Economics has calculated that the digital economy amounted to the US $ 11.5 trillion in 2016 or 15.5% of total GDP worldwide. A rate estimated to rise to 24.3% in 2025, equivalent to about US $ 23 trillion. In short, expected robust growth for the digital economy involving dizzying amounts. Incidentally, the research appeared before the world was affected by the coronavirus. The current situation may boost 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 an increasing demand for and an increase in expenditure on I (C) T services and products. You can, of course, buy Dutch ICT shares from Ctac or ICT Group. Or from the American 'tech classic' Microsoft or relative newcomer Slack. However, investing in individual shares is generally riskier than diversified investing through, for example, an investment fund or ETF.

However, as the sector is at the start of development, the range of investment funds and ETFs (for private individuals) is not yet large. During my search I came across two investment titles to accentuate and anticipate the expected growth of the digital economy within the portfolio: the iShares Digitalisation UCITS ETF (ISIN IE00BYZK4883) and the Pictet - Digital - I - Acc fund ( ISIN LU0340554673). For those looking for the latter fund within Binck's systems, there is a slightly different name: Pictet Digital Communication Acc. However, this concerns the fund with the above-mentioned ISIN.

Before I zoom in further, just a note. Regular readers know that I always discuss two investment titles side by side. This time, however, the iShares ETF is dropping: although the ETF follows cost friction after the benchmark, it scores only 2 stars at Morningstar. Risk and return, compared to comparable investments in the 'digital economy' category, are not completely balanced for this fund.

Fortunately, the Swiss house Pictet traditionally has a good eye for 'the markets of tomorrow'. The fund has 60 shares in its portfolio.

The fund has the MSCI ACWI Euro as a reference index. Since its inception on June 30, 2008, the fund (14.16% per year) has delivered a better return, in the form of price gains and dividends, than this index (7.29% per year). The fund, therefore, scores (very) well at Morningstar; four stars. The dividend, about 0.5-0.75% per year, is automatically reinvested. The running costs are 1.16%: defensible, given the good performance.

What else? As a nice extra, the fund invests in shares that score well on sustainable entrepreneurship and have a smaller CO2 footprint than their peers. Overall, the fund receives three globes from the Morningstar Sustainability Rating ™.

And the main risks? There is currency risk. The fund is listed in euros, but it contains many foreign companies. And of course, you run market risk. When financial markets are under pressure, you will experience that too. In terms of investing as a football coach, it is a midfielder with a sense for attack.

To summarize: the title is interesting for long-term investors who can and want to bear equity risk and who want to add a nuance to their portfolio with companies that are driving the development of the digital economy. And who (want to) have an eye for sustainability.

Author

Hans Oudshoorn

Hans Oudshoorn is investment trainer at BinckBank. He wrote the Dutch book 'Beleggen voor Dummies' and writes columns in several Dutch newspapers such as DFT, FiscAlert and NRC Handelsblad. 

The information in this article should not be interpreted as individual investment advice.  Although BinckBank compiles and maintains these pages from reliable sources, BinckBank cannot guarantee that the information is accurate, complete and up-to-date. Any information used from this article without prior verification or advice, is at your own risk.  We advise that you only invest in products that fit your knowledge and experience and do not invest in financial instruments where you do not understand the risks. 

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