ECONOMIC COMMENTARY

CIO Update: The impact of engagement in our digital world

Most of us are trying to maximize engagement, whether it’s at home, with family, or at work, but where engagement is most in focus is obviously in the digital world. While the opportunity lies in vying for the attention of the consumer, investors are challenged to find value in this space. This week, Shannon Saccocia, Chief Investment Officer examines the digital landscape and the factors impacting tech stocks and discusses where investor opportunities may be. Listen now.


Transcript

Hello and welcome to SVB Private perspectives.
I'm Shannon Saccoccia, chief investment officer at SVB private.
00:00:08
I want to thank you as always for joining us in looking back on the last year I started this podcast to respond to the extraordinary events in the markets in the economy which resulted from the COVID-19 pandemic.
00:00:21
Now as we look towards the one year anniversary of the widespread social restrictions that we experience and I remember my own final flight March 10th, flying back from New York City.
00:00:33
I feel that there are a number of new challenges ahead to discuss, but also new opportunities.
00:00:40
The massive monetary response and the continued fiscal cash outlay that we are experiencing is being replicated around the world.
00:00:49
Yields remain very low and investors are looking to risk assets, particularly stocks, for return opportunities.
00:00:57
And there remain areas of concern, taxes, trade policy and is still very uncertain.
00:01:04
Consumer environment are three that we will continue to spotlight in the coming months.
00:01:10
Today we will touch a bit on regulation and rotation, which will also represent a big part of the 2021 narrative.
00:01:21
Last week we talked about earnings and in discussing those earnings we highlighted the relative outperformance of companies when compared with analysts expectations.
00:01:32
Tech companies in general have outperformed over and over this last period both this quarter as well as the previous quarters.
00:01:42
From an earnings perspective.
00:01:44
But haven't necessarily benefited from that strong execution.
00:01:49
In fact, over the last several months, while big tech companies have delivered gains for investors, they have lagged other sectors which have felt a much bigger lift from this reflationary rotation that is starting to take hold.
00:02:05
So one of the outstanding questions as we move into this year is how will this dual edged sword of cyclical rotation and enhanced scrutiny of big tech impact the markets?
00:02:18 Shannon
The challenge, of course, is that any relative weakness in tech stocks.
00:02:22
Even if it's due to rotation, will have a disproportionately negative impact on the major benchmarks here in the US. So in order to have very strong returns in 2021 in the S&P 500 and certainly within the NASDAQ.
00:02:39
New investors or increased allocations to US equities will need to occur to increase the overall pool of funds rather than just experiencing this cannibalization that we're fearful of within the market. From technology to these rotation, reflationary rotation or cyclical sectors.
00:03:02
Given the outlook for bonds, move money movement into equities is certainly a possibility and we are already seeing that the other important factor to consider is the difference in the sector makeup of other indexes such as small cap and international indexes. These indexes tend to have lower weightings in technology than the S&P 500.
00:03:23
And therefore could benefit more from the relative outperformance of non technology so.
00:03:28
Factors that is actually what we've seen over the last few weeks, as well as not only have we seen increased flow to benchmarks or indexes or stocks within the universe of the Russell 2000 and the MSC IIFA.
00:03:43
We've actually seen those indexes start to outperform because they have a higher weight in these cyclical sectors that have been outperforming technology.
00:03:54
The positive though for tech companies as was laid bare by this aren't the quarters.
00:04:00
Earnings reports is that engagement remains very high, so the topic of engagement is everywhere.
00:04:07
At home.
00:04:08
I'm trying to maximize engagement with my kids in a way that my parents and grandparents certainly would never have imagined.
00:04:14
At work, employee Engagement is a focus not only for my HR partners and corporate HR partners in general, but it's a metric on which leaders are measured.
00:04:27
The lack of consumer or customer engagement for a particular product or business line can torpedo the entire thing even if there has been significant effort and costs put into building it, and engagement scores can even be used to persuade top talent to join an organization.
00:04:47
But where engagement is most in focus is obviously in the digital world, and considering we spent much of the last 12 months in gross in the digital world to a greater extent than ever before, it makes sense that it would be something that's being spotlighted by companies that are benefiting from it.
00:05:05
Earnings calls point to the variety of metrics that can measure this engagement.
00:05:09 Shannon
Things like digital ad revenues, new subscribers, an average revenue per user ARPU?
00:05:17
For those of you who are tired of hearing jargon are just a few examples of those.
00:05:22
Some of the impressive results for the companies that we've seen in the technology and communication services sectors.
00:05:28 Shannon
Is directly attributable to this stronger engagement over the last year?
00:05:33
An that's hardly surprising given this shift that we've seen to a work from home school from home.
00:05:39
Everything at home environment.
00:05:42
So with the American consumer proving to be such a captive audience, and this, you know, growth of digital ad spend.
00:05:52 Shannon
We have seen the rising value of companies like Alphabet and Facebook continued essentially unabated over the course of the last year.
00:06:02
Despite the pandemic and this in large part is due to the targeted advertising and the success of that advertising that these companies have used.
00:06:10
So there's no way.
00:06:12
They better to capture the audience for a product or service then by relying on data that tells you that customers or consumers might be interested in such a product or service, even in a very subtle way.
00:06:27
Amazon, for instance, has created an entire ecosystem of sellers.
00:06:32
That are vying for the opportunity to appear in that little ribbon at the top of your screen and streaming services are launching weekly, responding to consumer desires to be able to customize their viewing experience.
00:06:46
Existing services are being rewarded with new subscribers.
00:06:50
When a new series goes viral, so whether it's.
00:06:56
Pinpointing products and services for consumers and marketing them explicitly or implicitly through your platforms in order to create a higher percentage of action by those consumers or.
00:07:12
If it's playing on this fear of missing out with something going viral, whether it's a product or a show, all of those things are really based on the fact that companies are realizing how important it is to utilize the digital experience to improve their businesses.
00:07:31
Branding and marketing are more important than ever.
00:07:34
And so, while we may malign this pole of the digital world and the time that it retracts from other forms of personal connection, it's clearly working, which is.
00:07:45
Probably the number one reason that technology, stocks and communication services stocks and companies like Google and Facebook Amazon are likely to continue to post strong results is because they have found a model that works.
00:08:05
The negative, of course, is that.
00:08:07
Here in the United States, there's clearly a bipartisan effort to affect greater regulation on these big technology companies over the next few years.
00:08:17
Government officials, increasingly as I mentioned here, but also in the European Union, are voicing concerns about big technologies, access to data, and the reach of their businesses.
00:08:29
That create an anti competitive environment from you know, especially for smaller entry.
00:08:37
The data that underpins the effectiveness of digital advertising is one of the major targets.
00:08:44
Because of the privacy concerns around that, despite the fact that that is all fairly well understood that a lot of this data is being collected, you know the potential.
00:08:59
Ramifications of that and the way that that data could be utilized later is certainly something that's on the minds of technologists ever everywhere and.
00:09:12
Disruption in this space is such a threat with the competition amongst these platforms is so fierce that the importance of your data set and the data set that you're able to mine to be able to create this seemingly customized digital experience is incredibly important.
00:09:33
And so that points to investing in this space, which is also challenging.
00:09:38
Investors should be looking in our view to add exposure to long term trends.
00:09:43
Beneficiaries from those long term trends and so, whether that's from you know, semiconductor companies that could potentially continue to be leveraged to deliver a digital experience in things like cars or.
00:09:58
To social media companies that are potentially doing something different, but are more likely to be able to pivot with potential changes in regulation for the largest and most successful of these companies.
00:10:13
It's clear that the combination of this homegrown innovation as well as the acquisition activity they've had over the last several years has provided a clear competitive advantage.
00:10:25
That's not going to be easy to unwind overnight, but a change in these regulatory wins could force these companies to work.
00:10:34 Shannon
Ever harder to innovate and grow their revenues and earnings so?
00:10:41
Will there be potential disruption from regulation?
00:10:46
Perhaps the European Union has fined some of these larger companies such as Google significant sums of money over the last several years for their anticompetitive behavior?
00:10:58
It really hasn't managed to upend their business in any way.
00:11:02
While it's difficult to price out at this detailed level, the risks of the companies, it certainly is easy to see how opportunities based on some of these things that we've talked about in this call today could be presented to purchase these stocks against these headwinds.
00:11:18
But I think it's important to monitor the regulatory environment and which way these political winds are blowing as an important factor in the decision on how to build a portfolio of companies that seemingly have very long runways in front of them.
00:11:38
I'll be it with perhaps maybe a few speed bumps along the way.
00:11:46
Thanks again for listening to this weeks podcast.
00:11:49
I want to encourage all of you to reach out to our team here at SVB Private with any questions or concerns you may have.
00:11:55
If you have any questions or thoughts in my points today, you can find me on Twitter at Shannon Saccoccia.
00:12:01
You can also read our latest perspectives on the markets, the economy, taxes, a state planning and the year ahead.
00:12:07
By visiting svbprivate.com.
00:12:10
If you want all of this information delivered right to your inbox, I encourage you to sign up for our newsletters while you're on our site and be sure to subscribe to the SVB Private perspectives on Apple Podcasts, Spotify, or wherever you prefer to listen.
00:12:24
I look forward to coming to you again next week.

Shannon Saccocia serves as Chief Investment Officer at SVB Private, and is responsible for setting the overall investment strategy for the firm. She oversees the asset allocation, research, portfolio management, external manager search and selection, portfolio implementation, trading, and investment risk management functions.

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