One result of the coronavirus pandemic was that the global health crisis forced companies across the board to emphasize fiscal prudence.
Whether it was energy companies reining in exploration and production budgets, retailers shuttering stores, and many, many more cutting staff, reduced spending was the name of the game for a substantial part of 2020.
A recent survey from consulting giant McKinsey indicates that 43% pared fixed costs and another 29% reduced physical locations.
While some firms are still being conservative regarding expenditures, one area they can’t afford to be too frugal with is technology.
“One obvious area where firms bucked the cautious spending approach was technology. The increase in working from home, along with renewed cyber-crime worries and a continued shift towards online shopping, drove a sharp increase in technology investment,” writes Nationwide’s Mark Hackett. “Nearly two-thirds of respondents in the McKinsey survey noted an increase in funding of technology initiatives, while just 7% cut tech expenditures. Similarly, 44% of companies increased their technology-oriented employees, versus 11% who trimmed their tech staffs.”
Owing to a spate of recent cyber attacks, it’s reasonable to expect more companies will up spending on cybersecurity. Additionally, the growth in remote work fueled by the pandemic should result in more expenditures in the already booming cloud computing arena.
For investors, those points are relevant because, as just two examples, cloud computing and cybersecurity aren’t areas companies can afford to be cheap with. An array of recent lessons prove the point that being penny wise may actually be dollar dumb.
“While the unusual nature of the past year substantially influenced this data, there are clear signals for the direction of the economy and potential beneficiaries in the equity market,” adds Hackett. “The technology sector has proven to be critically important to the economy in times of stress, and spending in this area has mostly been durable during recessionary environments. Since the financial crisis, the technology sector has outperformed the broader S&P 500® Index by nearly 500% cumulative (1,020% versus 530%).”
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