While the onward trajectory of this curve is unknown, the prevailing demographic suggests the digital economy will be a significant driver of UK GDP over the coming years. It is anticipated that by 2040 the UK’s GDP will be nearly 7% higher than baseline GDP if increased investment in digital technology persists.
There are a number of sectors that will benefit from this evolution of the digital economy including: e-commerce, the auction industry and cybersecurity.
Digital evolution of the auction industry
Within the smaller companies asset class, one area of opportunity and innovation is the auction industry, which has been subjected to its own evolution in recent years due to a structural shift from physical to online auctions, along with a growing circular economy for second-hand goods.
One example, Auction Technology Group (ATG), operates in six marketplaces and has seen growth largely driven by the structural shift of physical auctions online. The market is still in the early development phase and therefore, structural growth should underpin earnings over many years with ATG also able to expand its value-added services though offering payments, logistics or insurance.
Because of this, ATG may prove resilient in a downturn as we observe that the use of auction houses increases during challenging economic environments.
Increased e-commerce requires physical, logistical infrastructure
Elsewhere, the structural shift from brick-and-mortar stores to e-commerce platforms has transformed the demand for efficient and reliable order fulfilment infrastructure.
Urban Logistics is a Real Estate Investment Trust which invests in the logistics sector, giving portfolios ‘picks and shovel’ exposure to the transition and growth in online shopping. The company purchases and develops ‘last mile’ logistic properties, where its tenants are typically third-party logistics companies and UK businesses who deliver staple domestic products and require last mile or e-fulfilment services.
The Covid-19 pandemic forced the already-growing online retail sector into overdrive, resulting in favourable demand and supply characteristics in this area of the property market. Additionally, property agent Cushman & Wakefield’s recent warning that the UK could run out of warehouse space will benefit Urban Logistics further through higher rental and capital values for several years.
Increased cybersecurity vital to the digital transition
NCC Group is a provider of Software Escrow and Cybersecurity Consultancy services to a wide range of customers across the UK, Europe and USA. With the acceleration and shift of economic activity to digital, demand for NCC’s services has only heightened and there is a continuing trend for political and regulatory pressures to drive attention and spending on cybersecurity. We believe that cybersecurity services will continue to grow over 15% per annum for the foreseeable future, driven by the growth of the connected environment, increasing dependence of cloud services and rising threat levels from individuals.
The structural shift to a digital economy underpins our conviction in these names. Offering unique exposure to exciting and emerging businesses, UK smaller companies are becoming an increasingly attractive option for investors searching for globally exposed disruptors within the digital economy.
Dan Green, portfolio manager for the Martin Currie UK Equity team