Ahead of the curve: New economy, same old returns?
“You can see the computer age everywhere but in the productivity statistics.”
That quip from Robert Solow, a Nobel laureate in economics, summed up the productivity paradox of the 1970s and 1980s. Arguably there is a parallel today, in that relatively low rates of productivity growth over the past decade appear to imply either that the technological frontier is expanding at a less rapid rate or that firms have been slower to adopt tech innovations into their business practices.
However, there is a more optimistic interpretation, which is that long-term economic projections should implicitly assume that any fallow period in innovation and adoption, whether real or a figment of measurement, will prove to be transient. Moreover, an acceleration in productivity from its post-crisis lows could catch investors by surprise.
Forecasting productivity, including its implications for corporate performance and global asset classes, is difficult. To form an assessment, one must consider trends in technology proliferation from the perspective of the economy, firms and investors. E-commerce provides a formative case study.
E-commerce, defined here as the absence of the consumer’s physical presence in the negotiation of terms, placement of orders or payment for purchases, is by no means a comprehensive measure of technology innovation or adoption in the modern economy. However, it is a fairly broad aspect of the ‘new’ economy and, crucially, it is measurable.
The first piece of supporting evidence indicating e-commerce proliferation has been broad comes from a proprietary measure using national aggregates of Chase consumer card transactions. We compute e-commerce transaction and expenditure shares at the national and industry level over the past five years (see figure) by adding up the Chase card transactions flagged as “card not present”. For the subset of consumption classified as retail sales, e-commerce activities account for 16% of expenditure value and 13% of transactions. Both measures are higher than the corresponding estimates from the US Census Bureau’s Monthly Retail Trade survey. For the industries classified as retail trade, the average e-commerce value share in official statistics was 8% over that five-year period.
The discrepancy between Chase and official measures is starker for services industries. So stark, in fact, that it can be explained by a difference between the Chase banking population and the overall US population.
Second, we explore what the proliferation of e-commerce means for corporates. Arguably it is both a positive innovation for firms’ productivity and cost structures and an inherent challenge to a subset of firms and sectors now facing greater competition.
One striking relationship is that retail trade industries that are more intensive in e-commerce tend to have flatter long-term trends in output price inflation. This could be consistent with e-commerce as an opportunity or a threat to firms, by lowering marginal costs or putting downward pressure on their margins, respectively.
Notwithstanding these crosscurrents, the overall influence of e-commerce on corporate performance appears to be positive. Sectors with higher e-commerce scores tend to have had faster revenue growth and margin expansion since 2010. They also have come to account for a larger share of MSCI All-Country World index (ACWI) earnings and have had a higher return on equity.
Third, we surveyed how investors can potentially access e-commerce in global markets. Within public markets, there are important geographic and sectoral concentrations of e-commerce exposure that investors should keep in mind. For example, roughly 60% of the e-commerce intensity in the ACWI universe is in the US, China and Japan, and skews toward information technology, consumer discretionary and industrials.
Looking at this, the nine combinations of these top countries and sectors account for 31% of e-commerce intensity within the ACWI universe. An important alternative access point for building exposure to e-commerce trends is through private markets, as the sector mix suggests. Information technology and consumer discretionary are relatively large shares of the US private equity benchmark, whereas sectors with lower e-commerce scores, like financials, tend to skew toward public markets
These e-commerce findings have broad implications. For long-term economic and market projections, these findings support a higher level of confidence that technology adoption will raise productivity from its current low levels and provide support for potential GDP growth and equilibrium rates of interest. As such, it would be a mistake to extrapolate the low growth post-crisis experience into the future.
“For long-term economic and market projections, these findings support a higher level of confidence that technology adoption will raise productivity from its current low levels and provide support for potential GDP growth”
These benefits of e-commerce are not without cost, though, and there is a voluminous academic literature linking rising wage inequality to, among other factors, the ‘skill-bias’ embedded in new technologies. From an investment perspective, the benefits to corporate performance for firms exposed to this trend hint at the value associated with identifying and accessing e-commerce, as well as other themes related to the digital consumer. Our analysis suggests that portfolio allocations related to e-commerce will straddle both public and private markets.
Benjamin Mandel is global strategist at JP Morgan Asset Management