23 Feb 2021
23 Feb 2021
The dramatic changes wrought by Covid-19 have upset basic assumptions about how cities work. And even though some urban changes were triggered by the pandemic, other major shifts – like remote work and digital commerce – were already growing well before it all began.
We believe that cities, the urban centres that drive so much economic growth, are undergoing a radical change. These changes will have long-lasting implications for the global economy and the performance of our investments.
We know our cities are already being reshaped by substantial forces: the global push to tackle climate change is making cities more sustainable and energy-efficient, while our increased reliance on data and connectivity means they are also becoming more digital.
Cities are hotbeds of innovation, and as they adapt to the new challenges, they will become smarter. Investing in the urban recovery could start to ‘future-proof’ your portfolio, combining the best of the utilities and industrials sectors, with an added growth tilt from the new technologies that will make it all happen.
Chart source: Lyxor International Asset Management, as at 12/02/2021.
Real estate booms when cities grow. But the pandemic has radically altered how we work, live, and play in cities. These changes explain how different sectors have performed in the past year: technology has boomed, while commercial real estate took a beating. Across markets, property equities fell by c.15-18 percent (in sterling terms) between February 2020 and today1.
Chart source: FTSE Russell, FTSE EPRA Nareit Global Real Estate Index Series, as at 11/02/2021. Past performance is not a reliable indicator of future returns.
Maybe that isn’t very surprising. When the pandemic hit, offices were suddenly shunned in favour of remote work. Yet productivity remains high, and it’s now estimated more than 20 percent of the workforce can perform work remotely– three to four times as many employees compared with pre-pandemic levels2.
Chart source: McKinsey, https://www.mckinsey.com/featured-insights/future-of-work/whats-next-for-remote-work-an-analysis-of-2000-tasks-800-jobs-and-nine-countries
With leases expiring and companies eager to slash property costs, the future of commercial real estate – both offices and retail spaces surrounding them – remains uncertain.
How we use these urban assets will change. “The future of urban, commercial real estate might not be quite as dire as expected,” says Lukas Neckermann, a Smart Cities strategist. “It might just look different than expected.”3
Cities were already changing to become smarter, more digital and sustainable, even before the pandemic. The big shifts, like working from home, look increasingly likely to become permanent. Urban real estate use is radically changing, creating new winners and losers.
Add these factors together, and we can see major investment opportunities in the urban recovery. A new horizon has opened up for industrial and technology companies that help businesses adapt operations or physical spaces to the new ways of working. Here are two examples:
Shift #1: More companies turn to cloud security
Almost 70% of organisations using cloud services today plan to increase their cloud spending in the wake of the disruption caused by Covid-194. And a recent survey shows information security has been the top priority for companies’ IT spending in 20215.
With digital security moving away from on-premise, appliance-based firewalls, some security companies stand to gain disproportionally: Fortinet, Palo Alto Networks and Checkpoint are three technology-security companies whose offerings heavily lean towards cloud networking.
Fortinet’s revenue growth, for example, saw little negative impact from Covid-19, as it recently reported a 22% y-o-y sales jump6; Similarly, Palo Alto reported 23% annual sales growth7.
Shift #2: A wave of refurbishment
The Elevator and Escalator (E&E) industry is attractive to investors, since it delivers the upside of the construction sector during boom times (through companies’ new equipment segment), while shielding from downturns (providing steady income through the maintenance and modernisation business).
To attract leasers, but also due to likely new health regulations, commercial properties are set for considerable refurbishment activity. Lifts are already being altered to adjust full load (which ensures less crowding in lifts) and include touch-free operations.
Leading players in the E&E market like Otis Worldwide may reap the rewards. Otis is the largest among E&E companies, and its business is led by the equipment-servicing segment. Its recently-reported full-year earnings-per-share not only beat the October forecast – but also the pre-Covid outlook8. Other E&E players, like Kone and Schindler Electric, could also stand to gain.
A range of concepts, products and services pull together to shape the future of sustainable Smart Cities, including smart connectivity (IoT), smart buildings, smart homes, smart safety and security, smart mobility, smart waste and water management, and smart energy and grids.
Diversification is key to capturing the full value of companies shaping the future of urban living. The six companies above are among over 130 stocks held by the Lyxor Smart Cities ETF, as at February 2021.
Our Smart Cities ETF follows a novel approach, mixing rules-based indexing, artificial intelligence techniques and human insight to effectively capture the theme:
The result is a diversified fund, avoiding the common trap of concentrated-investing in a few, well-known, large-cap stocks. In fact, approximately half of our Smart Cities ETF is invested in small and mid-caps (by market capitalisation), providing investors with access to growth potential.
Chart source: Bloomberg, Lyxor International Asset Management. Data as at 31/12/2020. Past performance is not a reliable indicator of future performance.
Our cities will recover from the Covid-19 crisis. As before, they’ll continue to attract people to work, to live, and to play. And throughout their recovery, new pockets of value are certain to emerge.
Our world is changing. Technological breakthroughs, economic evolution and the climate emergency are reshaping reality for billions of people. Will your portfolio keep up?
Each of our Thematic ETFs combines human insight, natural language processing and data analysis techniques in a unique way to identify the companies that matter most, and ensure your portfolio stays one step ahead. As a pioneering ETF provider with a history of innovation, we’ve gone the extra mile to build some truly state-of-the art funds for a new state of mind.
We’re incredibly excited about this range and hope you can join us in preparing portfolios for change.
*MSCI may seek input from outside market experts on the ongoing evolution of the theme underlying the index, and relevant seed words. However, such input is advisory only in nature. Use of any such input is at MSCI’s discretion, and may or may not lead to a change to the index or index methodology.
This article is for informative purposes only, and should not be taken as investment advice. Lyxor ETF does not in any way endorse or promote the companies mentioned in this article. Capital at risk. Please read our Risk Warning below.
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