The future is happening faster now

Di Yao, Portfolio Manager, 09/02/20

  • We view the economic disruptions of 2020 as an advantage for our strategy.
  • Consumer behavior is notoriously difficult to predict, and many of the trends we are witnessing today may be short-term shifts.
  • We believe many businesses, such as capital equipment manufacturers, stand to benefit from the trend of deglobalization.

The COVID-19 pandemic has brought fundamental changes to the world and will continue to do so in the months and years ahead. As technology investors, our philosophy is to invest in changes, innovations, and disruptions. We rarely see as much disruption as we have seen in 2020, and we believe this offers the potential for us to deliver competitive performance in our global technology portfolio.

We are not seeking short-term “virus beneficiaries”

In our research, we are looking to identify long-term trends that are triggered by structural changes. Many companies are currently benefiting from changes brought on by this health crisis, but we are careful about where we focus our attention. Consumer behavior is notoriously difficult to predict, and many of the trends we are witnessing today are likely to be short-term shifts rather than lasting structural changes.

How do we determine which companies are likely to capitalize on the current disruption? We look to areas of the technology sector that were already budding or growing rapidly before the onset of COVID-19. Examples include cloud adoption and e-commerce. In these areas, we are identifying businesses whose strong fundamentals and growth prospects have been accelerated, in our view, as a result of the pandemic.

Trends budding before the pandemic are accelerating

Cloud adoption Remote working arrangements increase demand for servers
E-commerce Consumers and businesses adapt to touchless payments
Deglobalization Countries turn to favor self-sufficiency over efficiency

Deglobalization: An investment opportunity

We are also studying a catalyst that may be less familiar to investors — the trend of deglobalization. In the past two decades, the technology hardware industry has built an efficient global supply chain. Put simply, it is a “built in Asia/consumed in the developed world” model. However, we believe we were beginning to see flaws in this model even before the 2020 pandemic, due in part to rising protectionism. Since the start of the U.S.–China trade conflict two years ago, we have seen examples of businesses shifting their manufacturing away from China as additional tariffs were imposed on Chinese products.

Now, the Covid-19 pandemic has triggered global awareness about economic self-sufficiency versus efficiency. This year, as the crisis led to equipment shortages and supply chain delays and disruptions, more companies have considered moving manufacturing plants out of China. Many businesses will be hurt by this global reshuffling of manufacturing bases, but we believe many stand to benefit, including capital equipment makers. We believe this “reverse globalization” will boost growth as new manufacturing facilities are built.

A notable development was the announcement in May that Taiwan Semiconductor Manufacturing [TSMC], one of the world’s largest producers of silicon chips, plans to build a manufacturing facility in Arizona. It is quite a breakthrough to see a major Asia-based technology company make such a large investment in the United States after decades of moving in the opposite direction. We believe TSMC will at least double its current U.S. manufacturing capacity over time.

We continue to view the economic disruptions of 2020 as an advantage for our strategy, and we are selectively adding to high-conviction holdings during times of market weakness. We actively manage the portfolio with bottom-up fundamental research, seeking companies that can profit from the global demand for technology products and services.

As of 6/30/20, Taiwan Semiconductor Manufacturing was not held in Putnam Global Technology strategy. TSMC is highlighted as a company that has been impacted by the COVID-19 economic disruption and is relevant to the global reshuffling of manufacturing investment opportunity being discussed. The current investment opportunity and company presented were selected without regard to whether such opportunity or relevant securities, were or will be profitable and are intended to help illustrate the investment process. The inclusion of company information should not be interpreted as a recommendation to buy or sell or hold any security. It should not be assumed that investment in the security or investment opportunity mentioned was or will be profitable.

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