Spotting Trends: Sectors to Consider in a Changed World
• The COVID-19 pandemic has created a new trend line for our society, creating opportunities as behaviors change
• Long-term opportunities in software and clean energy exist, as well as near-term prospects for homebuilders as the economy aims to recover.
Apart from the human tragedy of COVID-19, the pandemic has created a new trend line for our society by disrupting every aspect of our daily routines, from how we make purchases and consume energy to how we stay connected. Some of these trends were in place before the pandemic. But now, they are likely to be amplified as we transition to a new world order.
Identifying true opportunities during a tectonic shift of this magnitude requires using specialized, industry-specific knowledge to capitalize on an evolving market regime.
We see three potential opportunities where we believe investors may benefit from targeted sector-based strategies – both for right now as the economy starts to recover and as the post-pandemic world continues to evolve and impact future generations.
Software: Solutions to support a new way of life Remote access, cloud storage, and internet-based solutions were strong secular trends before COVID-19. Today’s more digitally-connected world will require more software to function. And as we said in our mid-year outlook , we see software as the backbone of our new society. As a result, software and service firms may benefit from this seismic shift in corporate and consumer behavior across a variety of dimensions: video conferencing, e-learning, telehealth, project and document management, closed system social communication tools, cloud technologies, digital payments, and cyber security.
This generation-defining shift is one reason why earnings growth for software firms are expected to grow at 16% per annum over the next three to five years – compared to 10% for the broader market – and not see double-digit declines throughout the rest of 2020 and into 2021. In fact, as shown below, while the S&P 500 is projected to have negative sales growth over the remaining three quarters of this year, software and services firms are projected to continue to grow their top line each quarter. Valuations are a bit above their long-term average for the industry1, but with a lack of growth in our current environment the premium for a growth industry with the potential to reshape society is warranted.