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NEW ECONOMY, SAME OLD RETURNS?

KEY POINTS

  • The extent of e-commerce adoption is substantially higher than official statistics suggest.
  • Businesses with higher e-commerce activity levels have exhibited higher rates of profit margin improvement, potentially boding well for investors.
  • Information technology and consumer discretionary sectors represent pockets of high e-commerce activity present in both public and private equity markets. However, the private equity market holds a greater concentration of these potential e-commerce investment opportunities.

You can see the computer age everywhere but in the productivity statistics.” That quip from Robert Solow summed up the productivity paradox of the 1970s and ‘80s. Relatively low rates of productivity growth over the past decade have led some to question whether that paradox has returned. They are concerned that the technological frontier may be expanding at a less rapid clip or that firms have been slower to adopt tech innovations in their business practices. We are not convinced.

Using e-commerce as a case study to assess recent trends in technology, we arrive at a more optimistic view. We believe that, as productivity accelerates from its post-crisis lows, any periodic slowdown in technological innovation or adoption will be short-lived. Our long-term economic growth and capital market return assumptions reflect this view. The key for investors will be identifying those businesses most likely to benefit from these trends.

Using three novel data sources, we analyze the intensity and proliferation of e-commerce in the U.S. economy, its potential impact on corporations, and whether these trends are best accessed through public or private markets. For our purposes, we define e-commerce as the negotiation of terms, placement of orders or payment for purchases without the consumer’s physical presence. The following findings are the source of our optimism:

  • The extent of e-commerce adoption is substantially higher than official statistics suggest. This appears to be the case, in general, across retail trade and services industries.
     
  • The intensity of e-commerce usage tends to be positively correlated with corporate performance: Businesses with higher e-commerce activity have had higher rates of revenue growth and profit margin improvements, higher asset turnover, less leverage and lower capital expenditures to sales ratios. Of course, beneath industry averages, the experience of individual firms has been highly differentiated.
     
  • There are regional and sectoral pockets in public equity markets that are e-commerce-intensive, including, for example, the U.S., China and Japan and industrial, information technology and consumer discretionary sectors.
     
  • Private companies account for a nontrivial share of e-commerce-related activity. Technology and consumer discretionary sectors, for example, have high e-commerce intensity and are relatively large shares of the U.S. private equity benchmark.

One thing is certain: E-commerce is changing the way that individuals consume and businesses conduct transactions. These findings give us a higher level of confidence that technology adoption will raise productivity growth from current low levels, with greater benefits accruing to those firms that are levered to this trend. For astute investors, the advancement of e-commerce can create attractive investment opportunities—accessible through both public and private markets.

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2020 Long-Term Capital Market Assumptions

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