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Thematic investment opportunities in digital

August 2019

The long road to digital transformation

As advanced as the global transition to digital may feel there's still a long long way to go. Which means investment opportunities abound.

Back in 2013, Eric Schmidt, the then executive chairman of Google, made waves with the prediction that everyone on Earth would be connected to the web by 2020. With less than a year to go until the deadline, internet penetration is still far short of Schmidt’s ambitions, at just 57 per cent of the world population.1


Forecast growth of digital ad spending worldwide

digital ad spending worldwide

Source: eMarketer

That means there is still an awful lot of growth to come as digital penetration rates increase – and a wealth of attractive investment opportunities to tap into.

Take shopping, for example. Of the USD24 trillion spent by global consumers last year, only 12 per cent was spent online.2 In five years’ time, the value of Internet shopping is forecast to more than double. That should also boost online payments - currently, PayPal accounts for just 3.1 per cent of total payments made worldwide.3

Changes in shopping habits will go hand in hand with a broadening in the range of goods becoming available for purchase online. Merchants, meanwhile, will be better able to track inventories and collect customer information, paving the way for more effective marketing. 

Better data collection from online shopping and browsing, in turn, will help drive further growth of digital marketing. A quarter of a century since the first ever banner ad, digital now accounts for half of all the money spent on media advertising. By 2023, the share is expected to top 60 per cent (see Fig. 1).4

New opportunities

The rise of digital has opened up established industries to new players, as fixed costs have fallen and as bigger companies have in many cases been slow to keep pace with innovation.

In finance, for example, just 10 per cent of fintech venture capital deals attract investment from banks.5 This is a particularly fertile field for tech innovation, such as mobile and digital payment solutions, peer-to-peer lending platforms and the rise of blockchain technology. Facebook’s plans for Libra – a cryptocurrency that will be backed by a basket of assets – is particularly eye-catching. The potential digital finance market is huge: there are currently 1.7 billion adults around the globe currently outside the financial system without access to a traditional bank.6

Banks may be investing more in interactive and alternative software than many other industries, but they will need to ramp this up further to protect their business from digital challengers.

In healthcare, meanwhile, digital penetration rates have even greater scope to rise. The sector’s IT budget is worth just 3.5 per cent of total revenues.7 Notably, very little is spent on digital software. We expect this to change, with the centralisation of patient data enabling better analysis and real time diagnosis.
Fig. 2 cloud leads it spending priorities
Net percentage of companies planning to increase IT spending by category
IT budgets by category

Based on survey of US & Canadian companies. Source: Computer Economics, "IT spending and staffing benchmarks 2019/2020"

Such trends aren’t confined to finance and health. World-wide, there is scope for companies’ IT budgets to increase 10-fold over the coming years as cloud computing offers businesses of all stripes the opportunity to improve flexibility and reduce costs. 

The Z-factor

As tech-savvy younger generations grow up and wield more power – both financial and political – the digital revolution will accelerate further. People born between 1995 and 2010, known as “Generation Z” have been dubbed “true digital natives”: the vast majority of them own a smartphone and they spend a large chunk of time each day online – in many cases 10 hours or more.8

Today, Generation Z accounts for nearly a third of the world’s population. Their older – though still digitally savvy – Millennial counterparts are almost as numerous.9 Together, they represent a huge market, one which encompasses messaging software, smartphones, online dating, gaming, fintech, internet TV, online-based sharing economy services and e-commerce

Research from the consultancy McKinsey shows younger generations do not distinguish between experiences and connections in the online or the physical world. It would be fitting, thus, if Schmidt’s digital dream was fulfilled on their watch.