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The impact of COVID on the tech industry has been profound: Portfolio Manager

Erika Klauer, Portfolio Manager and Managing Director at Jennison Associates LLC joins the Yahoo Finance Live panel to discuss the impact of COVID on the market and tech stocks.

Video Transcript

- Let's dig into that question a little bit farther here, because we have been discussing that rotation away from some of those tech stocks towards cyclicals. But obviously a new case count may be pumping the brakes on that. Here to chat that rotation with us, here's our next guest. Erica Klauer is Portfolio Manager and Managing Director at Jennison Associates. And Erika, I appreciate you being here to chat.

When we look at that, I know you've had a focus here on the chips-- Apple's large holding. Talk to me about what you've seen in some of the shakiness as that rotation's played out, because it seems like we're back and forth now in this chop.

ERIKA KLAUER: Well good afternoon. And it is-- it's a fascinating time right now. Because at the beginning of the year what we didn't know was when there would be a vaccine. We didn't know much about coronavirus. But we know a lot more now. And we know that there will be a vaccine. We just don't know the timing. And as you've talked about in the last several minutes, it's likely that in the very short term we are likely to have more pain with regards to shutting down businesses.

The impact on the technology industry has been profound in the sense that this virus basically has accelerated the transition to a digital economy. And that's both for consumers and for corporations. And we've seen that across industries and across geographies. There has been a massive acceleration to digitization that has given rise to unbelievable opportunity for many technology companies around the world.

- How much of that demand though has actually been pulled forward? When you look at some of these cloud names that have really accelerated over the last few months, there is a concern that while the growth has been significant this year, they may not be able to maintain the kind of momentum going into next year.

ERIKA KLAUER: Akiko, that's a great point. Certainly there were companies that saw what I would call a temporary benefit as people were at home, working from home, learning from home. And we will have people ultimately get back to work. So really what we have to focus on is, what are the longer term trends? How do we see that people are going to work and live differently over a long period of time in which companies can capitalize on that?

I oftentimes smile because my parents, who are in their 70s, would never have dreamt before of not taking their check to the bank to cash it. And now they're very proficient in taking a picture with their phone and depositing their check that way.

We still have a long way to go, for example, even with the amount of transactions in the world that are still done in cash today. Believe it or not, 85% of all transactions in the world are still done in cash. So there's an incredible opportunity for more digital payments. There's an incredible opportunity for advertising, digital advertising dollars. Only half of all advertising dollars today are done digitally. And that market still has a lot of room to grow.

But I also think there's other places to look, for example, within the B2B space-- companies buying and selling from one another. That's a $16 trillion industry, which today is only 8% done online. So there are lots and lots of opportunities that I think are sustainable beyond this unfortunate COVID virus that we have to live with for several more months. I think that the overall digitization though of the economy has been permanently put into a much higher secular growth rate as a result of it.

- Yeah. Let's talk a little bit more. I want to double up on Akiko's question about the pull forward there, because obviously there's cloud to discuss here, but also hardware. We got the update from Apple this week about their new M1 chip and how they're, you know, forgoing Intel there.

It seems like a very interesting time in the semiconductor space. If you do have a pull forward of all these devices it might look like it's a little bit weak there. Obviously Nvidia and the Arm deal is still kind of up in the air. We're going to wait and see what comes through on that front. But when you look at the chip space, explain this time right now that we're on the edge of, historically looking back, since there is this kind of weird rotation with Apple going their own.

ERIKA KLAUER: So with the semiconductors and in particular in talking this past week with my most excellent team members at Jennison, we have been talking about the fact that right now we are not seeing signs of excess inventory anywhere in the channel.

We are, however, seeing very swift changes in market share. There is becoming a wider divide between those companies that use technology to advance the development of their semiconductors and those companies that also are leveraged to the highest growth markets that do very well at the expense of others. So it's really putting the onus on us to roll up our sleeves and figure out those haves and have-nots within the industry.

I think that the interesting feedback I would say is that one executive that we had a conference call with this past week said one of the longer term effects of COVID is that in the past we measure personal computers, for example, per household. But that just doesn't work anymore because one person is playing games inside the household, one person is doing their homework on the computer, one person is working, having video conference calls. And so that market probably has shifted more permanently to a one PC per person market. So that market, which, for example, has really been into time for the last three, four, five years is likely to show some more modest growth going forward.

Other areas-- I would say in the hardware-- obviously you were talking about the handset market. I think the interesting thing about the handset market is that it is a mature market. It's a largely penetrated market, even in emerging markets, because we have phones spanning from $40 to well over $800.

- Yeah.

ERIKA KLAUER: What I would look to is really the opportunity that exists for building out the infrastructure. So, for example, in India, 70% of all users are still on 2G technologies. And as we have the demand from those users who have no access to wired technologies, that creates an immense amount of opportunity, not only for the companies that are supplying the handsets and mobile devices to that market, but also building out that infrastructure.

- Yeah. Back here at home, for everybody's who's been working at home, it's obviously not easy to battle everybody in the family to use just one or two devices in the house. But we'll see how it all plays out. Erika Klauer, Portfolio Manager and Managing Director at Jennison Associates. Appreciate you taking the time.

ERIKA KLAUER: Thanks so much.