While some short-term investors took fright at the fourth quarter sell-off in the IT sector, and across growth stocks generally, longer-term investors can see lower valuations as opportunities to increase exposure to their favored stocks. As such, the Robeco Trends team’s focus has been on technology companies that are capitalizing on consumers’ insatiable appetite for voice-controlled devices.
Smart speakers, such as Google Home and Amazon Alexa, form a key element of the Internet of Things, which connects devices across the home, including smart TVs, fridges, central heating thermostats and home security systems. Voice control is the latest step in facilitating easy access to technology systems, being easier, quicker and much more intuitive than typing on a keyboard.
Consumers are flocking to the technology - around 25% of US households now have at least one smart speaker and Neele and Speetjens expect this trend to gain momentum in other countries, initially led by English-speaking markets. In time they foresee similar levels of penetration as in the US. Chinese platforms are already replicating the technology with a view to capitalizing on the growth potential. The investment case for companies enabling voice-controlled technologies is not without risk, including regulatory factors, such as growing regulation in the EU and the Digital Services Tax based on revenues.
Neele and Speetjens fully anticipate ongoing regulatory scrutiny as to how the big players handle information from devices such as always-on smart speakers. Hence, to fully capitalize on the growth potential, companies will need to maintain, and in some cases, raise investment in areas such as data security. Nevertheless, even in the face of a push for tighter regulation over the use of data, they believe that the growth story for voice-controlled technologies remains compelling.
Even as the economic slowdown in China plays out, emerging consumer classes offer huge growth potential, according to the Robeco managers. While China has been the big growth story over the last decade, consumer markets there have become much more developed, and very competitive. However, Neele and Speetjens have become increasingly interested in the growth of the consumer space in India.
Having lagged China, perhaps by up to ten years, in terms of urbanization and consumerization, they believe that India now offers exciting prospects, helped by rapidly growing population ¬¬- in contrast to China, where the population has largely plateaued. In fact, many of the developments seen in China over the last decade are now playing out in India, driven by factors such as urbanization and the rapidly growing consumer classes’ appetite for both premium food products and basic necessities as retail channels increasingly commoditize.
Hence, Neele and Speetjens have built exposure to companies similar to those their team bought into in China a decade ago, including those with unique, efficient distribution channels, category leaders in areas such as supermarkets and in particular food product producers (such as biscuit manufacturers). Distributors with a distinctive presence, such as high number of High Street outlets and/or a dominant online position - also have caught their attention.
While the Chinese consumer market has become crowded, the Robeco fund managers recognize that it’s still a huge market with some interesting opportunities, albeit that they are scarcer nowadays. India is at an earlier stage on the growth phase, a factor that can carry higher risks as well as opportunities. While China’s been trying to rebalance its economy away from exports towards the rapid growth of domestic consumption, India remains more of an internally focused economy, with relatively high levels of domestic consumption, a factor that underlines the growth potential given the ongoing emergence of the domestic consumer class.
Neele and Speetjens have built exposure to companies geared to the long-term trend of growing awareness of health & well-being amongst consumers. Think of the surging popularity of health-based smartwatches, such as FitBits, or note the growing consumer interest in the composition and provenance of the food they eat.
Although this trend is not limited to any one demographic, many young people in particular now pay more attention to the ingredients and composition of the food they eat, with a willingness to pay a premium for more natural, ethically sourced and/or organic foods, including foods that are compliant with specific dietary requirements. As well as specialized food producers selling direct to the more health-conscious public, opportunities can also arise among specialized ingredients suppliers to larger food producers.
Such suppliers fitting the Robeco Trends team’s theme are, however, becoming more difficult to identify as the biggest food producers, themselves mindful of the health & wellness awareness trend amongst consumers, engage in M&A activity. For example, French headquartered food giant Danone bought US-based WhiteWave Foods, a supplier of organic dairy products and plant-based dairy substitutes, with a view to better meeting consumers’ changing preferences.
While the fourth quarter sell-off saw 2018 calendar year returns brought back down to earth, with market returns for the year turning negative but the fund retaining its good relative performance, the companies Neele and Speetjens invest in have continued to enjoy double-digit earnings growth. Valuations are now back towards the lower end of our longer-term range, therefore making them more attractive, even on a timescale stretching back three or four years.
Hence, for the stocks the Robeco managers like, the expected earnings growth-to-valuations relationship has become more favorable, giving them strong grounds for optimism over their potential returns. Looking ahead, Neele and Speetjens are prepared to look beyond short-term market fluctuations as they aim to capitalize on powerful underlying global growth trends in consumer markets.
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