With Covid-19 accelerating the speed of digitalisation, talking heads just cannot stop talking about epoch-defining technology like artificial intelligence (AI), machine learning (ML) and e-commerce.
Yet according to New York-based fund management firm Global X, there is one sector that may have flown somewhat under the radar — gaming and esports. Locked at home and deprived of sports on television, people are turning to gaming to entertain themselves.
According to Stefen Hall, project lead, media, entertainment and culture, at the World Economic Forum (WEF), US telco Verizon found an increase of 75% in gaming traffic during peak hours from March 10 to 17 amid the Covid-19 lockdown, compared to increases of 12% in digital video traffic and 20% in web traffic during 1Q2020 as a whole. Livestream software firm Streamlabs also discovered that platforms like Twitch, YouTube Gaming and Facebook Gaming have seen usage hours surge by 20% across all services as a result of the Covid-19 pandemic. Gaming giant EA Sports experienced a 15.9% return in 1H2020, beating US benchmark indices like the Dow, the S&P 500 and the MSCI US, all of which fell due to the Covid-19 shock.
“During Covid-19, we saw a lot of people starting to be brought into the gaming ecosystem. Parents of teenagers and children who saw their kids playing games wanted to interact with their kids at home,” says Jay Jacobs, head of research and strategy at Global X, which is part of Mirae Asset Global Investments Group.
In the US, the gaming industry saw a 9% growth in revenue in 1Q2020 and some of the larger players experienced 20% y-o-y revenue growth as purchases and user engagement increased overall. This acceleration, Jacobs believes, would have taken months or even years if not for Covid-19.
Best of all, this rapid growth is likely to stick. While Jacobs does acknowledge that a slight dip is definitely a possibility as lockdowns are lifted, he believes that a significant number of new gamers would now be “hooked” on the concept and thus continue beyond the pandemic.
The industry is, therefore, expected to record more aggressive growth in the medium to longer term. WEF’s Hall believes that this growth would accelerate the shift by gaming companies expanding their offerings over mobile and cloud-based platforms and bring esports into the mainstream, thereby benefitting brand values and tapping a wider customer base.
Another theme that Global X sees picking up post-Covid-19 is robotics and AI. With growing trade tensions and pandemic risks, says Jacobs, businesses can no longer take for granted the smooth operation of their supply chains. With a growing shift towards reshoring business operations likely to take place in the coming years as firms look to strengthen supply chain security, the Global X team sees greater capital investment into automation to offset the extra labour costs of shifting their operations away from emerging markets where wages are lower.
Covid-19 has served only as a catalyst for a trend that experts have been observing even before the pandemic. “Our research reveals that increasing automation is positively associated with reshoring of production. The driving mechanism behind it is that using robots for production back in the home country becomes cheaper over time due to increasing efficiency in automation,” say economists Astrid Krenz, Klaus Prettner and Holger Strulik in a WEF opinion piece. They note, however, that it will be skilled workers rather than low-skilled ones who are likely to benefit from such a shift.
E-commerce is another key trend to follow, says Jacobs, as consumption patterns will be dictated by Covid19 until a vaccine is created. “The Asia-Pacific region alone will account for 64% of total e-commerce sales worldwide this year, experiencing 25% year-on-year growth to reach US$2.271 trillion [$3.157 trillion],” observes a 2019 report by Rakuten. China is the world’s biggest e-commerce market worth US$1.935 trillion, while Indonesia is the fastest-growing e-commerce market in the world at around 20% growth per annum.
The power of themes
How can investors best capitalise on these emerging trends? For Global X, the answer lies in thematic investing. “Thematic investing refers to the process of identifying powerful macrolevel trends and the underlying investments that stand to benefit from the materialisation of those trends,” explains Jacobs. He describes thematic investing as a long-term, growthfocused strategy unconstrained by geography or sector, resulting in a more diversified fund structure.
For Global X, developing its speciality exchange-traded funds (ETFs) involves two main steps. First, the company identifies some of the most powerful trends transforming the global economy today, before working with an index provider to create a custom index that stands to benefit from the rise of that theme. With a preference for pure plays in a given trend, the firm builds targeted portfolios where different parts have a low correlation with one other, bound instead by relatable concepts that investors can actually see shaping the world around them.
Themes are identified with a strict three-stage process to ensure that Global X’s ETFs will stand the test of time. First, the firm chooses themes that have the potential to disrupt the global economy, conducting an indepth analysis of metrics like future expected growth rates and total adjustable market to find the trends that will define the future economy. Global X then looks at investability — it needs at least 20 to 30 companies to form an ETF — before analysing if such themes can remain profitable over a period of years or decades.
“Thematic investing provides an alternative to traditional strategies — one that leverages the greatest strengths of institutional investors while providing the opportunity to develop proprietary knowledge and informed opinions,” say McKinsey consultants Vincent Bérubé, Jonathan Tétrault and Sacha Ghai. They observe that investing in this way would increase the likelihood of institutions delivering superior returns over time within a more complex investment landscape.
Nevertheless, choosing the correct theme remains a difficult task that involves several risks, chiefly, picking the right theme, the best fund subscribing to that theme, and timing of the investment. Still, Global X claims that its three-step process greatly reduces the chance of selecting an unprofitable theme, with the long-term salience of these themes overcoming short-term market fluctuations.
And the market seems to agree. In the past five years, Jacobs says, the number of thematic ETF products tripled and assets under management grew from US$5 billion to US$25 billion. For 2Q2020 in particular, Global X finds that assets under thematic investment grew from US$25 billion to over US$40 billion. “Covid-19 has certainly captured people’s attention towards thematic investing as they look to invest in the new stay-athome economy,” he says.
Like similarly disruptive periods in history such as World War II and the Great Depression, the significant disruption brought about by the global Covid-19 pandemic has caused radical shifts in how consumers adopt new products and technologies. Specifically, says Jacobs, it is serving as a huge accelerant and market expander for new technology. The market is adopting technology more quickly than usual, while consumers who would typically not have adopted such technology (for example, the elderly) are forced to adopt these technologies to survive.
Such a transformation could see many of these themes having a disproportionately large impact on the post-Covid19 economy. Investors agree, with many technology stocks staying resilient despite market pressure from global Covid-19 lockdowns. On June 9, 2020, the Nasdaq made history as it broke its 10,000 level for the first time ever, with investors loading up on tech blue chips — particularly Amazon and Apple, both of which hit record highs.
The state of the market
The current volatile stock market and the significant amount of liquidity in the stock market make it an attractive time for investment. “No previous infectious disease outbreak, including the Spanish Flu, has impacted the stock market as forcefully as the Covid-19 pandemic. In fact, previous pandemics left only mild traces on the US stock market,” says a White Paper by the Becker Friedman Institute at the University of Chicago. Investors are tempted into riding volatile price movements in search of greater profit in spite of weak economic fundamentals.
“People have the ability to take more risk and we are seeing trading going on. Maybe this is because people are at home doing other things and there are a lot of things going on at the sidelines,” says Global X’s chief investment officer Jon Maier.
He worries, however, that central banks are at risk of overstimulating into the recovery by continuing fiscal action for too long. He calls on them to get more creative in trying to prevent pandemic aftershocks from permanently scarring growth and averting deflation. Central banks, he says, must shift away from merely keeping markets open towards encouraging lending.
Ultimately though, Maier says that the best sign of recovery will be a sustained recovery in the labour market. He believes that any equity rally that takes place without a corresponding reduction in high unemployment is not based on a sound economic basis.
With China — the world’s second largest economy — gradually reopening its economy as it places Covid-19 under control, Maier believes that Chinese growth could help pull the world out of the Covid19 economic slump. A major escalation in the US-China trade war, he predicts, will likely be put off by the US to minimise equity markets disruption before the US presidential elections in November.
“The promise of China is undeniable. For Japan, the European Union and the US, you are going to hear a lot of terrible news till the end of the year, and then I believe the recovery will start taking place,” Maier concludes, though he warns that any such recovery is likely to be a slow and measured one. Investors, perhaps for now, should stick to games.
