Listen to the podcast below. A transcript follows.
Host: Hello and welcome to Talking Markets: exclusive and unique insights from Franklin Templeton.
Ahead on this episode: the impact of the coronavirus crisis on investing in innovation, including how some companies are becoming more valuable near term in the current environment. Here’s Matt Moberg, portfolio manager with Franklin Equity Group, speaking with Renee Anderson.
Renee Anderson: The market has been digesting a lot of uncertainty over the past few months. What’s your outlook from here?
Matt Moberg: We take a long-term view on the economy, and we still believe we are in the middle of the fourth industrial revolution. When you compare the changes in the economy occurring due to COVID-19 and the long arc of change in innovation which is happening, from our perspective, as we think about this in the long term, COVID-19 will either be an accelerant of innovation in many cases, or from a longer-term perspective, will be immaterial to the change that is occurring. So from our perspective, it’s either advancing some of the change and innovation or, it’s not going to change the accelerating pace in which innovation continues to advance in the economy today.
Renee Anderson: With the market showing signs of recovery, do you still see upside for investors right now?
Matt Moberg: We do, and we do for a few reasons. The first is on the long arc of time, investing in innovation, particularly when it’s accelerating, should be a good time to be a long-term investor. However, the second reason in which we are positive is, and it’s a little bit more from a near-term perspective, and that is, that the virus has actually in many cases, pushed the timeline forward for adoption of many new innovations. Money is flowing more readily into vaccines, into testing. Both of those require a certain amount of say, genetic testing. There are also accelerants with video and voice communications within e-commerce, and all those are actually accelerating beyond what perhaps our initial expectations were due to the changes in the marketplace. I think one thing that can be hard for investors is this concept of anchoring and anchoring on price. Many of these companies, in our opinion, may be worth more than they were before the crisis.
For example, if you were profitably delivering groceries, and trying to get customers to adopt for many years and say, just for example, growing at a 20% rate and then, due to the virus, saw your growth accelerate to a 50 or even 80% rate, then your business might actually be worth more due to the crisis despite the poor economic data. And so, anchoring on the fact that in this particular case, the worth of a company might actually be worth more than its February highs might make sense. And, that company might still be undervalued if it’s experiencing permanent or semi-permanent change in consumer behaviour.
So, that’s just a very simple example of some of the things that we’re seeing in the marketplace which actually make us optimistic, and being able to feel that we’re still finding good opportunities in the marketplace.
Renee Anderson: How does investing in innovation influence how you think about sectors?
Matt Moberg: One thing we have tried to take advantage of over the years is the fact that there are significant misclassifications, and that often happens in the areas that are new. Some historical examples would include animal health care, in which companion animals are both in the area of health care and also consumer discretionary. The growth of health care for companion animals has been a secular tailwind for many, many years, particularly here in the West—one which we actually think will continue. However, some have argued its consumer discretionary. Others have argued that it’s health care. Certainly, that was true when the industry was developing. From our perspective, we try to take advantage of that.
Another example has been search or social networking. These are, in our mind, media companies because they get greater than 90% of their revenue from advertising dollars. Many view them as technology companies. From our standpoint, we’re indifferent. What we think about though is the fact that in both of these examples, the money is coming either from consumer discretionary or it’s coming from advertising. And so, we think about these businesses holistically and realise that sometimes the rating agencies can start out with misclassifications. And that’s something that we try to use to our advantage.
Renee Anderson: What about your location being near Silicon Valley [in the United States] and the value that it brings?
Matt Moberg: From our perspective, there is a bit of a mindset in Silicon Valley of change and acceptance of change and acceptance of disruption, we really embrace that. And so we think it certainly is to our advantage. Certainly, our entire network of people that we know is deeply immersed in the culture of Silicon Valley, which has grown so many wonderful businesses. And [we’ve] really been at the forefront of a lot of the change that’s occurred in our economy. And so, from that perspective, being located in Silicon Valley does have an advantage. Really the advantage is sort of mindset and then, the communications that we have simply with our neighbors and the people around us.
Renee Anderson: Matt Moberg with insights on the current market environment and its impact on investing in innovation, as well his long-term strategies. Matt, thank you for joining us.
Host: And thank you for listening to this episode of Talking Markets with Franklin Templeton. If you’d like to hear more, visit our archive of previous episodes and subscribe on iTunes, Google Play, Spotify, or just about any other major podcast provider. And, we hope you’ll join us next time when we uncover more insights from our on the ground investment professionals.
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What Are the Risks?
All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. The technology industry can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants as well as general economic conditions. Investments in fast-growing industries, including the technology and health care sectors (which have historically been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasising scientific or technological advancement or regulatory approval for new drugs and medical instruments.