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Digital Payments and Aerospace—Diverse Growth Opportunities

Digital Payments and Aerospace—Diverse Growth Opportunities



New-economy digital business models proved resilient and defensive amid the pandemic-induced collapse in economic activity, and this widening performance differential is particularly interesting to us as investors in industry-leading growth companies. We are also interested in some of the more compelling structural growth companies in cyclical industries that have been particularly affected by the economic slowdown.

Recovery Accelerates

Following the peak of the pandemic and related lockdowns, economic activity accelerated strongly in June in China, Europe, and the United States, including both manufacturing and services.

Our preferred supply side indicator—orders in excess of inventories—registered double-digit improvement in the euro area and is already back to positive territory in the United States. Crucially, a rebound in new orders drove the improvement.

Unprecedented fiscal support, combined with healthy corporate and household balance sheets at the start of the pandemic-induced recession, points to a continued strong sequential recovery, although we do not expect either gross domestic product (GDP) or corporate profits to recover to pre-pandemic levels this year.

China, Europe, and the United States followed somewhat different approaches to containing the spread of the virus. These differences may affect the trajectory and speed of the recovery in each of these major global demand centers, with the United States lagging and likely to continue to fall behind given the resurgence of cases.

From a corporate performance perspective, new-economy digital business models proved more defensive and resilient amid the pandemic-induced collapse in economic activity.

While the majority of S&P 500 Index companies saw year-over-year revenue declines in excess of 10% during the first quarter, the fastest growers clocked up double-digit gains. This widening performance differential is particularly interesting to us as investors in industry leading growth companies.

While valuation multiples appear inflated due to depressed earnings, this is largely consistent with historical recovery environments.

Looking forward, however, successful containment of the virus, combined with improving prospects for an effective vaccine, are likely to pave the way for a broadening of market leadership to include more traditional cyclical companies as their earnings begin to stabilize and reaccelerate.

This will be the ultimate catalyst to see a style reversal in the market, where the valuation differentials of high-growth companies relative to all others will likely be compressed. We are monitoring this closely.

Electronic Payments

Given that backdrop and this period of high uncertainty, we are focused on understanding the durability of the competitive advantage of those digital business model winners, the nature of the acceleration of their growth, and how much of that future success is priced into the stocks. Electronic payments are a key focus area in that context.

The adoption of digital, electronic, and cashless payments is not a new story; it has been a decades-long phenomena, predating e-commerce.

But online shopping has been a massive catalyst, as have mobile penetration, availability of better and easier payment solutions, and evolving consumer habits/preferences—not to mention cleanliness.

All were in place long before COVID-19. Perhaps not surprisingly, we have material exposure to the payments industry, both direct and indirect, in most of our investment strategies.

Before this year, electronic payments growth and penetration had been steadily increasing, growing at about two times GDP in many major economies, including North America.  McKinsey calculates that mobile transactions in China grew at a compound annual growth rate (CAGR) of 123% from 2013 to 2018.

During the pandemic-related closures, both consumers and merchants have increasingly adopted digital payments as they adjust to the realities of this new world.

During the pandemic-related closures, both consumers and merchants have increasingly adopted digital payments as they adjust to the realities of this new world. Mastercard reported “card-not-present” transactions as a percentage of total volumes in April moving from 40% last year to 50% this year. Visa reported that similar transactions were up 1,200 bps in April as well.

Interestingly, PayPal said there has not been a decline from elevated levels as economies have reopened, and it has also observed new demographics moving online. Worldline believes that COVID-19 is a “true accelerator” of cashless trends.

We have observed an acceleration in lower-penetration categories (such as grocery, pharmacy, and furniture) and an emergence in newer areas of the digital economy (such as education, healthcare, food delivery, gaming, and digital media). And the consumer experience is proving to be a positive one.

Payment practices have historically proved to be sticky, so we believe this step change will create a new baseline. In fact, we believe the electronic payments penetration growth story has accelerated by up to three or four years. Card payments growth could increase by an additional 100 bps per year.

While these stocks have performed well in the face of altered consumer behavior, we think this industry is the beneficiary of accelerating structural growth, and the stocks remain compelling.


In contrast to digital payments, the pandemic has cast a tremendous amount of uncertainty on the aerospace industry. While there may be limited visibility, many of these stocks remain quite depressed and may represent a significant valuation as well as growth opportunity when activity normalizes.

Air travel and aerospace manufacturing companies are good examples. Many of our portfolios have material exposure to the commercial aerospace industry because, in our view, consumer demand, company (and product) quality, and the industry structure have converged to be a very compelling long-term investment opportunity. There is certainly less cyclicality to their sales and profits now than in previous decades.

Technological breakthroughs have changed the return profiles for the aerospace component manufacturers materially. The last 20 years have seen an industry transformation: planes now run much more efficiently and longer, not to mention more safely, and consolidation of the industry has also helped profit growth.

Many parts makers have shifted to consumption-based business models, and this combined with lower competition and disruption makes for highly visible cash flows.

We believe the aerospace industry will recover to pre-COVID levels by 2022.

On the demand side, growth of air travel has been an inexorable trend for decades. We still see very low penetration of air travel in most of the higher growth parts of the world, and aspirational consumption of travel is very real.

Thus, demand has steadily risen, while the cost per seat mile has declined in similar fashion. There remains a massive total addressable market (TAM) opportunity.

This growth has clearly been disrupted by the pandemic, with global air traffic during the second quarter bottoming at just 10% to 15% of the January 2020 level. We have observed this to be coincident with pandemic-related death rates.

Since then, China domestic travel has now recovered to 80% of prior peak levels, and Europe is likely to be there by mid-July. The United States probably has more near-term uncertainty, but even Southwest Airlines has been planning for resuming 100% of its capacity by year-end.

There is some visibility into schedules and we believe that during the third quarter, global air traffic will be back to 40% to 50% of pre-existing capacity.

That is the near-term story, and it will not make much of a difference to the industry’s financials or likely the stocks. We are focused here on the intermediate to long term.

Importantly, airlines around the world have not experienced many bankruptcies. They are better run, and in many cases have received government support, so we believe the risk to the manufacturers’ customer base is low.

Thus, with some volatility expected, we believe the aerospace industry will recover to pre-COVID levels by 2022. Prices of these stocks, however, remain about 40% to 60% below their pre-COVID levels.

Final Thoughts

In this confusing period, visibility of growth is being bid up, while uncertainty is being punished.  In reality, the actual stock risk/reward may be better where it is less visible. Twelve months from now, we would expect either the gap in actual growth or the gap in visibility of growth to narrow. This presents a very compelling opportunity.

As growth investors, the critical point of these two examples is that we strive to strike a balance between different types of growth in the portfolios such that we can deliver consistent performance through different economic backdrops and market environments.

Ken McAtamney, partner, is a portfolio manager on William Blair’s Global Equity team.

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Fighting the Surveillance State Begins with the Individual

It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in…



It’s a well-known fact at this point that in the United States and most of the so-called free countries that there is a robust surveillance state in place, collecting data on the entire populace. This has been proven beyond a shadow of a doubt by people like Edward Snowden, a National Security Agency (NSA) whistleblower who exposed that the NSA was conducting mass surveillance on US citizens and the world as a whole. The NSA used applications like those from Prism Systems to piggyback on corporations and the data collection their users had agreed to in the terms of service. Google would scan all emails sent to a Gmail address to use for personalized advertising. The government then went to these companies and demanded the data, and this is what makes the surveillance state so interesting. Neo-Marxists like Shoshana Zuboff have dubbed this “surveillance capitalism.” In China, the mass surveillance is conducted at a loss. Setting up closed-circuit television cameras and hiring government workers to be a mandatory editorial staff for blogs and social media can get quite expensive. But if you parasitically leech off a profitable business practice it means that the surveillance state will turn a profit, which is a great asset and an even greater weakness for the system. You see, when that is what your surveillance state is predicated on you’ve effectively given your subjects an opt-out button. They stop using services that spy on them. There is software and online services that are called “open source,” which refers to software whose code is publicly available and can be viewed by anyone so that you can see exactly what that software does. The opposite of this, and what you’re likely already familiar with, is proprietary software. Open-source software generally markets itself as privacy respecting and doesn’t participate in data collection. Services like that can really undo the tricky situation we’ve found ourselves in. It’s a simple fact of life that when the government is given a power—whether that be to regulate, surveil, tax, or plunder—it is nigh impossible to wrestle it away from the state outside somehow disposing of the state entirely. This is why the issue of undoing mass surveillance is of the utmost importance. If the government has the power to spy on its populace, it will. There are people, like the creators of The Social Dilemma, who think that the solution to these privacy invasions isn’t less government but more government, arguing that data collection should be taxed to dissuade the practice or that regulation needs to be put into place to actively prevent abuses. This is silly to anyone who understands the effect regulations have and how the internet really works. You see, data collection is necessary. You can’t have email without some elements of data collection because it’s simply how the protocol functions. The issue is how that data is stored and used. A tax on data collection itself will simply become another cost of doing business. A large company like Google can afford to pay a tax. But a company like Proton Mail, a smaller, more privacy-respecting business, likely couldn’t. Proton Mail’s business model is based on paid subscriptions. If there were additional taxes imposed on them, it’s possible that they would not be able to afford the cost and would be forced out of the market. To reiterate, if one really cares about the destruction of the surveillance state, the first step is to personally make changes to how you interact with online services and to whom you choose to give your data.

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Stock Market Today: Stocks turn higher as Treasury yields retreat; big tech earnings up next

A pullback in Treasury yields has stocks moving higher Monday heading into a busy earnings week and a key 2-year bond auction later on Tuesday.



Updated at 11:52 am EDT U.S. stocks turned higher Monday, heading into the busiest earnings week of the year on Wall Street, amid a pullback in Treasury bond yields that followed the first breach of 5% for 10-year notes since 2007. Investors, however, continue to track developments in Israel's war with Hamas, which launched its deadly attack from Gaza three weeks ago, as leaders around the region, and the wider world, work to contain the fighting and broker at least a form of cease-fire. Humanitarian aid is also making its way into Gaza, through the territory's border with Egypt, as officials continue to work for the release of more than 200 Israelis taken hostage by Hamas during the October 7 attack. Those diplomatic efforts eased some of the market's concern in overnight trading, but the lingering risk that regional adversaries such as Iran, or even Saudi Arabia, could be drawn into the conflict continues to blunt risk appetite. Still, the U.S. dollar index, which tracks the greenback against a basket of six global currencies and acts as the safe-haven benchmark in times of market turmoil, fell 0.37% in early New York trading 105.773, suggesting some modest moves into riskier assets. The Japanese yen, however, eased past the 150 mark in overnight dealing, a level that has some traders awaiting intervention from the Bank of Japan and which may have triggered small amounts of dollar sales and yen purchases. In the bond market, benchmark 10-year note yields breached the 5% mark in overnight trading, after briefly surpassing that level late last week for the first time since 2007, but were last seen trading at 4.867% ahead of $141 billion in 2-year, 5-year and 7-year note auctions later this week. Global oil prices were also lower, following two consecutive weekly gains that has take Brent crude, the global pricing benchmark, firmly past $90 a barrel amid supply disruption concerns tied to the middle east conflict. Brent contracts for December delivery were last seen $1.06 lower on the session at $91.07 per barrel while WTI futures contract for the same month fell $1.36 to $86.72 per barrel. Market volatility gauges were also active, with the CBOE Group's VIX index hitting a fresh seven-month high of $23.08 before easing to $20.18 later in the session. That level suggests traders are expecting ranges on the S&P 500 of around 1.26%, or 53 points, over the next month. A busy earnings week also indicates the likelihood of elevated trading volatility, with 158 S&P 500 companies reporting third quarter earnings over the next five days, including mega cap tech names such as Google parent Alphabet  (GOOGL) - Get Free Report, Microsoft  (MSFT) - Get Free Report, retail and cloud computing giant Amazon  (AMZN) - Get Free Report and Facebook owner Meta Platforms  (META) - Get Free Report. "It’s shaping up to be a big week for the market and it comes as the S&P 500 is testing a key level—the four-month low it set earlier this month," said Chris Larkin, managing director for trading and investing at E*TRADE from Morgan Stanley. "How the market responds to that test may hinge on sentiment, which often plays a larger-than-average role around this time of year," he added. "And right now, concerns about rising interest rates and geopolitical turmoil have the potential to exacerbate the market’s swings." Heading into the middle of the trading day on Wall Street, the S&P 500, which is down 8% from its early July peak, the highest of the year, was up 10 points, or 0.25%. The Dow Jones Industrial Average, which slumped into negative territory for the year last week, was marked 10 points lower while the Nasdaq, which fell 4.31% last week, was up 66 points, or 0.51%. In overseas markets, Europe's Stoxx 600 was marked 0.11% lower by the close of Frankfurt trading, with markets largely tracking U.S. stocks as well as the broader conflict in Israel. In Asia, a  slump in China stocks took the benchmark CSI 300 to a fresh 2019 low and pulled the region-wide MSCI ex-Japan 0.72% lower into the close of trading.
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iPhone Maker Foxconn Investigated By Chinese Authorities

Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple…



Foxconn, the Taiwanese company that manufactures iPhones on behalf of Apple (AAPL), is being investigated by Chinese authorities, according to multiple media reports. Foxconn’s business has been searched by Chinese authorities and China’s main tax authority has conducted inspections of Foxconn’s manufacturing operations in the Chinese provinces of Guangdong and Jiangsu. At the same time, China’s natural-resources department has begun onsite investigations into Foxconn’s land use in Henan and Hubei provinces within China. Foxconn has manufacturing facilities focused on Apple products in three of the Chinese provinces where authorities are carrying out searches. While headquartered in Taiwan, Foxconn has a huge manufacturing presence in China and is a large employer in the nation of 1.4 billion people. The investigations suggest that China is ramping up pressure on the company as Foxconn considers major investments in India, and as presidential elections approach in Taiwan. Foxconn founder Terry Gou said in August of this year that he intends to run for the Taiwanese presidency. He has resigned from the company’s board of directors but continues to hold a 12.5% stake in the company. Gou is currently in fourth place in the polls ahead of the election that is scheduled to be held in January 2024. The potential impact on Apple and its iPhone manufacturing comes amid rising political tensions between politicians in Washington, D.C. and Beijing. Apple’s stock has risen 16% over the last 12 months and currently trades at $172.88 U.S. per share.  

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