Two UBS equity analysts argue that spending by banks and corporations on fintech and digital finance is going to keep going up – creating a range of investment opportunities for portfolio managers.
Sundeep Gantori, equity analyst at UBS Global Wealth Management, says tech disruption of finance traces back to the introduction of the iPhone in 2007. The next big driver will be the introduction of digital currencies, starting with China’s central-bank/electronic payment (DCEP) project.
Digital fiat money will drive banks, fintechs, telecom companies and internet companies to invest more on things like data centers and user interfaces. And as more Chinese people get digital renminbi on their mobile wallets, they will find ways to spend it, further driving growth in the ecosystem around digital finance.
How big a fiscal injection might this mean for the economy? Gantori says Chinese banks are laggards when it comes to spending on technology, many budgeting only 2% to 3% of revenues to I.T., versus 6% to 8% internationally. So there’s a lot of upside to bank budgets going to enabling their digital reach.
UBS estimates that DCEP will turbocharge revenues among leaders in the fintech ecosystem from $150 billion in 2018 to $500 billion in 2030.
Where to find fintech plays
For investors, it’s not the banks that will drive performance in portfolios, however (although Gantori says there is a handful of well-resourced global banks that could outperform). He says pure-play fintech and digital payments companies should outperform.
This is a difficult market for equity investors because so many of the top fintechs are private, but more are going public – not least the likes of Ant Group and Lufax (Gantori did not name specific companies).
Eva Lee, head of Hong Kong equities, says in China new opportunities will emerge among smaller tech companies providing value-added services to the dominant internet platforms operated by Alibaba and Tencent.
This is because even in China – the global leader in digitalization – market penetration of fintech remains low. In China, although digital commerce rules in the tier-1 cities, overall online commerce is under 40% of retail sales.
In fintech, although mobile payments now account for 83% of transactions in China, only 16% of lending is done online, and only 6% of insurance transactions and 5% of wealth-management product sales.
Payments is widely regarded as a loss leader but these other areas can be very profitable, so Lee says companies providing such digitalized services should enjoy huge growth and outperform.
More broadly, the UBS analysts favor companies related to the data centers that support cloud adoption, and the rollout of 5G, itself an important driver of cloud spend. Smartphone suppliers and cybersecurity companies are another growth story.
Together the leading companies in these fields in China should enjoy superior earnings growth of 20% to 25% on a 12- to 18-month basis, Lee says.
The same trend holds true internationally, with COVID-19 serving as a useful accelerator. Gantori estimates another 2 billion people will begin to use the internet over the coming decade, raising internet penetration to over 80% of the world’s population.
There remains vast opportunities for software-based financial services that scale. By the end of this decade, other technologies such as quantum computing and neural interfaces (cyborgs!) will have thrown up new, money-making companies.
Since the iPhone, tech stocks have clocked average annualized returns of 17.5%, versus just 8.3% for the MSCI World. The UBS analysts believe that divergence will endure.
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