4th Quarter 2020

At the dawn of a new decade, the global economy is changing rapidly with the rise of the services sector. The world’s Gross Domestic Product (GDP) accounted for by services is experiencing a sharp increase in developed regions and especially emerging economies, such as Sri Lanka and Brazil. This growth in services has not only transformed the make-up of the world’s economic production but has altered trading patterns. In the U.S. economy, the services sector (a broad category of the economy that includes technology, media, financial services and transportation) is, by far, the largest contributor to GDP, accounting for nearly 70% in 2018. This contribution has rapidly accelerated in recent years as value added by service producing industries now accounts for 79% of total growth in GDP.

The fusion between mature manufacturing and service companies with intangible assets, such as digitization and software, are creating new and accelerated growth opportunities and value
to shareholders.

Even more transformative is the growing nexus of physical (tangible) products and digital (intangible) technologies, which is revolutionizing what manufactured products can do and contributes to a renewal of their value and place in the economy. Examples abound and include Smart TVs that are networked for streaming, exercise equipment that comes with videos or live streamed instructions, cars with navigation systems, printers with ink jet replacement subscriptions and so on. The takeaway is that investors have a much broader choice in incorporating technology into their portfolios and, as a result, it is a misappraisal to define technology representation as consisting exclusively of companies in the tech sector. Traditional companies with dynamic management have embraced this paradigm shift, reversing and extending the lives of their maturing products and creating new shareholder value. Companies that embrace the rise of services are creating jobs and wealth, and they are making products we rely on more efficient.

While cancellations and postponements of public activities and curtailment of leisure and business travel may slow the coronavirus, it is taking its toll on consumer spending and general economic activity. These restrictions will force exposed businesses to curtail operations, lay off workers and possibly strain to service debts. The coronavirus shock has raised the specter of a recession for the first half of this year. Economists at JPMorgan Chase expect output to fall by an annual rate of 2% in the first quarter and another 3% in the second quarter. The reality is that the necessary steps to slow and/or contain the virus restricts economic activity and dampens consumer confidence.

Central banks, the Treasury and Congress have an array of tools to soften the impact. Although interest rates are near or below zero with not much bandwidth for further cuts, low yields will help national governments borrow to expand their fiscal stimulus. The purpose is to offset as much contraction in demand as possible. As of this writing the Fed added $500 billion to each of its one-month and three-month repurchase operations, is committed to buying $700 billion in Treasury bonds and mortgage-backed securities, on top of additional funding for overnight and two-week repos. This addition is a substantial injection in short-term liquidity. The Fed has also promised significant purchases of longer-term maturities across the yield curve, which in effect is a reintroduction of Quantitative Easing, a tool where the Fed purchases bonds with cash providing banks with additional money supply to make loans.