- The global equity market’s exposure to the digital economy has nearly doubled since 2016, indicating a significant shift in alignment with this long-term trend.
- The digital transformation was driven mainly by incumbent firms’ rising market values, with revenue from operational shifts contributing somewhat, but new market entrants contributing very little.
- Disentangling the impact of a firm’s index weight and operations on thematic exposures can offer valuable insights as investors navigate the post-pandemic landscape and align their portfolios with structural trends.
Lockdowns and social distancing during the COVID-19 pandemic spurred consumers and companies alike to rapidly embrace digital technologies, accelerating progress that might otherwise have taken a decade to achieve. Investors may now have greater exposure to the digital economy than they realize. The question then arises: Can we measure the digital transformation within a firm? If so, what are the implications for equity investors moving forward?
To explore these questions, we use a framework that attributes the changes in thematic exposures within an index. A change in exposure can result from a change in a constituent firm’s size or shift in operations. Our analysis is designed to help investors understand how their portfolios are positioned relative to long-term trends.
Global equities’ thematic exposures have grown
Since 2016, the global equity market’s exposure to several themes, or megatrends, has grown markedly. Our previous work demonstrated how such exposures can help drive stock performance in a rapidly changing world. Using the same framework, we see that global stocks, represented by the MSCI ACWI Investable Market Index (IMI), have substantially larger exposures to several themes today compared to late 2016, the earliest date available for our analysis.
Digital footprint of the MSCI ACWI IMI has increased since 2016
Thematic exposures are a weighted share of constituents in the MSCI ACWI IMI associated with a particular theme as of December 31 of each year shown.
The exposure to companies involved in the digital economy, including streaming, cloud services and payment networks, has nearly doubled to over 15% today from 8% in 2016. Another theme whose exposure is rapidly expanding — doubling since 2016 — is efficient energy, which includes companies involved in renewable power generation and alternative fuels.
Media coverage of concepts related to these two themes also rose over the same period, as shown below. Of the two themes, digital businesses received the lion's share of media attention.
Media mentions of themes were up, but with noticeable disparities
Media intensity is based on data from MKT Mediastats and measures share of media coverage based on keywords associated with the 17 MSCI megatrends. Gray traces indicate all other themes. Data is from January 2015 through December 2022, which is the longest time frame available.
Thematic exposure can be influenced by a firm’s weight and its operations
To investigate why the MSCI ACWI IMI has greater digital exposure today than in 2016, we examined two factors: (1) changes in a firm's index weight from higher market capitalization, and (2) changes in a firm’s operations that generate higher theme-related revenues.1 We adapted our prior work on risk attribution for the analysis.2 New index entrants, such as IPOs and spinoffs, and divested holdings, such as delistings and bankruptcies, can also affect an index's changes in exposure.
We find distinct reasons for the heightened exposures to both themes. Growth in the digital economy theme was dominated by incumbent firms’ expanding capitalizations, with some contribution from operational shifts. Interestingly, despite numerous recent IPOs, new entrants with digital-focused business models contributed minimally to the digital transformation of the MSCI ACWI IMI.
The effects of firm size and operations on thematic shifts varied by theme
Bars represent the share of the total change in digital exposure from December 2016 to December 2022 in the MSCI ACWI IMI. Size refers to changes in constituent firms’ weights, and operations refers to changes in firms’ digital-related revenues.
New entrants, however, played a significant role in increased exposure to the efficient energy theme. In contrast to the digital economy theme, the revenue-mix changes of incumbent energy firms, including major oil explorers and producers, had a more substantial impact on exposure than index weights. Changes in revenues and their downstream effects on thematic exposures could also stem from alterations in a firm’s disclosure practices rather than in actual business changes.
We looked more closely at the digital economy theme to compare the sources of greater exposure in the years before and after COVID-19, as shown below. The increase in exposure before the pandemic, from 2016 to 2019, came primarily from the larger index weights of a few U.S. technology mega caps. Since 2019, however, the increase in exposure has come mainly from firms’ higher share of digital-related revenues.
The turn toward digital after COVID-19 was driven more by firm operations
Blue bars represent the change in exposure to the digital economy theme in the MSCI ACWI IMI from December 2016 through December 2022. Grey bars represent total exposure to the digital theme.
Top five contributors to the larger digital footprint since 2019
Five stocks — Apple Inc., NVIDIA, Intel Corporation, Meituan Class B and Accenture plc Class A — were responsible for a large share increase in digital exposure following the pandemic. Apple contributed the most, with the boost in revenue from its turn to online stores and services proving more influential than its jump in weight to 3% from 2% in the MSCI ACWI IMI. NVIDIA and Intel, known for their design and fabrication expertise that propelled the digital rise of numerous firms, took the next two top spots. Intel's contribution stemmed primarily from its operations as its index weight fell over the period.
A handful of firms led higher digital exposure since 2019
Bars represent the percentage contribution to the change in digital economy exposure in the MSCI ACWI IMI from December 2019 to December 2022.
Our analysis reveals a nuanced picture of why thematic exposures have changed. The attribution pattern for the digital economy theme didn’t hold true for all themes, however. A clear understanding of the forces behind thematic shifts could be valuable for investors who seek to align their portfolios with lasting, structural trends.
The authors thank Zoltan Nagy for his contribution to this post.
1A firm's operations are represented by its thematic relevance score, which indicates the significance of a theme to its business activities. The score, ranging from 0% to 100%, considers both upstream activities and disclosed revenue or earnings streams. However, it does not explicitly measure the revenue proportion derived from theme-related activities.
2Using this method, a change in portfolio exposure can be directly related to its sources: changes in position sizes or changes in position characteristics. The decomposition is additive and distributes the often-confusing interaction term between sources.
Further Reading
A Thematic Lens for Portfolios