After a Remarkable Year for Innovation, What’s Next? | Lord Abbett
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Equity Perspectives

We believe a number of trends that came into focus in 2020 have potentially positioned innovation equities for continued growth for the next decade.

Read time: 3 minutes

A “black swan”—the COVID-19 pandemic—came to define 2020 for the world and highlighted the critical importance of innovation in society and markets.1 The digital divide—the gap between technology and tech-enabled leaders and the disrupted—widened dramatically, especially in the early phase of the crisis, as the economy was locked down to fight the spread of the virus.  E-commerce saw its share of retail surge 50% in six months as traditional stores struggled; spending on cloud computing continued to strengthen as companies moved key technology functions online; and virtual empowerment technologies like Zoom, Teledoc, and Chegg saw adoption and usage grow by multiples.

Perhaps most importantly, the power of the Genomics Revolution had a triumphant validation, as multiple firms produced effective vaccines for the greatest public health threat of the last 100 years in just 10 months. That apparent victory is the result of new, more precise, and effective drug development from modern biotechnology.

These uptrends countered the devastating effects of the pandemic on already vulnerable areas of the economy, such as many areas of brick-and-mortar retail, and those healthier areas that simply require crowds (e.g., leisure and travel). Some of these industries are poised to come roaring back in 2021, in our view; others may never recover.

Looking Forward
We believe the decade ahead should see more validation of these and other secular trends (artificial intelligence, electric vehicles, advances in medical devices, robotics, etc.) that, at least for the time being, appear unstoppable and are yet still underestimated, in our opinion. For investors, we continue to argue there are three key themes in the economy and equity markets: Innovation, Durability, and Vulnerability, and that the traditional Growth/Value framework is not accurately reflecting the competitive dynamics of this changing world.

What does that mean for investors? We think they should position themselves on the right side of the tech revolution with innovation equities, while also identifying durable, sustainable companies that can stave off innovation’s risk of displacement. Looking at the last of our three themes, vulnerability, we believe investors should steer clear of ostensibly cheap “value traps” that may be headed to oblivion, given their poor competitive positioning in this Age of Innovation. Some stocks have low price-to-earnings ratios for a good reason, meaning that formulaic approaches to value premised on “cheapness” alone may be in for more disappointment.  We believe “agility”, “durability”, and “resiliency” are the better traits to look for on the Value side of the equation (if we must continue with the Growth/Value framework).

As for the bigger picture, while we expect the decade ahead to be a good one for equity markets overall, it will likely not be an egalitarian one across the broad indexes. Instead, we think it is likely to be much more Darwinian, with tech-enabled winners making tremendous gains, and often causing more pain—or even bankruptcy—for laggards unable to compete. We are also likely to see regulation play a big role, as governments look to address competitive and privacy concerns among the dominant tech companies today. In short, this is the time for active management to shine.

Summing Up
In our view, the 2020s likely will be full of vibrant successes in innovation amid an ever-changing landscape of creative destruction, as new industry leaders emerge, and former frontrunners fade. The 20 biggest firms by market capitalization in the S&P 500® Index in 2030 likely could look very different from those that topped the list in 2020. There will undoubtedly be pullbacks based on doubt, valuation concerns, and economic uncertainty. Those will likely be compelling buying opportunities for long-term investors.  We have been saying that this market is not the same as 1999-2000; the fundamentals are just too strong and the future too bright for innovation.  But we will say that investing in this space requires agility and expertise—it is not a space to access like a game of darts or with limited knowledge (or an ETF, for that matter). 

All of which speaks to a powerful story: the need, in our view, for investors to have a large allocation to innovation to ensure they have exposure to the winners of the tech revolution. Moreover, we also believe that having an active, agile security selection process that can adapt to changing leadership and focus on firms with superior operating momentum is the most effective way to grow wealth and manage risk. Lastly, it is critical to continuously assess—and have the flexibility to invest—in both the current generation of growth leaders and smaller, faster-growing emerging leaders of tomorrow.

 

1 ”Black swan” is a term popularized by author Nassim Nicholas Taleb to describe rare and unpredictable outlier events that may have an extreme impact on society and financial markets.

 

A Note about Risk: The value of investments in equity securities will fluctuate in response to general economic conditions and to changes in the prospects of particular companies and/or sectors in the economy. While growth stocks are subject to the daily ups and downs of the stock market, their long-term potential as well as their volatility can be substantial. Value investing involves the risk that the market may not recognize that securities are undervalued, and they may not appreciate as anticipated. Smaller companies tend to be more volatile and less liquid than larger companies. Small cap companies may also have more limited product lines, markets, or financial resources and typically experience a higher risk of failure than large cap companies. The value of an investment in fixed-income securities will change as interest rates fluctuate and in response to market movements. As interest rates fall, the prices of debt securities tend to rise. As rates rise, prices tend to fall.

No investing strategy can overcome all market volatility or guarantee future results. 

Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.

This article may contain assumptions that are “forward-looking statements,” which are based on certain assumptions of future events. Actual events are difficult to predict and may differ from those assumed. There can be no assurance that forward-looking statements will materialize, or that actual returns or results will not be materially different from those described here.

Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that markets will perform in a similar manner under similar conditions in the future.

Glossary and Index Definitions

Price-to-Earnings Ratio: Stock analysts calculate a price-to-earnings ratio by dividing a stock's current price by its earnings per share on a trailing 12-month basis. A forward price-to-earnings ratio is calculated by dividing a stock's current price by estimated future earnings per share.

The S&P 500® Index is widely regarded as the standard for measuring large cap U.S. stock market performance and includes a representative sample of leading companies in leading industries.

Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.

The information provided herein is not directed at any investor or category of investors and is provided solely as general information about our products and services and to otherwise provide general investment education. No information contained herein should be regarded as a suggestion to engage in or refrain from any investment-related course of action as Lord, Abbett & Co LLC (and its affiliates, “Lord Abbett”) is not undertaking to provide impartial investment advice, act as an impartial adviser, or give advice in a fiduciary capacity with respect to the materials presented herein.  If you are an individual retirement investor, contact your financial advisor or other non-Lord Abbett fiduciary about whether any given investment idea, strategy, product, or service described herein may be appropriate for your circumstances.

The opinions in this commentary are as of the date of publication, are subject to change based on subsequent developments, and may not reflect the views of the firm as a whole. The material is not intended to be relied upon as a forecast, research, or investment advice, is not a recommendation or offer to buy or sell any securities or to adopt any investment strategy and is not intended to predict or depict the performance of any investment. Readers should not assume that investments in companies, securities, sectors, and/or markets described were or will be profitable. Investing involves risk, including possible loss of principal. This document is prepared based on the information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy and completeness of the information. Investors should consult with a financial advisor prior to making an investment decision.

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