I. Sector Landscape and Outlook

Technology businesses across the world have reshaped the way we live our lives. Tech-businesses have taken long strides and made a big impact on the UK economy. This 21^st century industry has contributed to the British economy by strengthening the financial, healthcare, manufacturing, education and logistic sectors. The UK boasts one of the largest global technology eco-system with thousands of tech start-ups which are building a robust entrepreneurial culture. Further, the global renowned technology companies are using technological innovations from Britain, including 5G communication, artificial intelligence (AI) and internet of things (IoT).

UK Technology Sector -A record year in VC investment in 2019 

In the global technology arena, the UK's technology sector is the third largest in the world, with the state-of-art facilities and resources to stay ahead of the curve. In 2019, more than £10bn poured into UK tech start-ups. Interestingly, this record investment was witnessed despite Brexit related uncertainties hovered throughout 2019. The amount of venture capital investment in UK-based technology start-ups has significantly outstripped investments in US and China-based tech start-ups. In 2019, the total venture capital investment in British tech start-ups surged by 44% to £10.1bn, whereas in the same time investment into the US and China-based tech start-ups dropped by 20% and 65% respectively, according to the data revealed by government-backed group Tech Nation.



Primarily, financial technology and healthcare start-ups attracted a major chunk of the funding in 2019. According to data revealed by Dealroom, the UK secured 1/3^rd of the £30.4bn of investment raised in Europe between January 2019 through December 2019. Also, the growth in VC investment in the British tech start-ups surged above 40% for the third consecutive year.

The consistent investment in UK tech start-ups shows the strength of the British tech industry and making it the darling of the UK economy. The way VC investors are opening strings of their wallet to buy UK tech start-ups exhibits the global confidence in the British tech companies. Further, the glut of VC investment is also creating new jobs and wealth across the nation.

Further, the record investment in the UK tech start-ups ranks it behind only the United States and China on the global scale and "The City-London" secured the title of the world's third most funded location with the companies based out of London raising approximately £7.4bn out £10.1bn of total investment in the UK last year.

Moreover, the consistent increase of VC investment in the UK tech star-ups has created eight (8) new billion-dollar or unicorn companies in 2019 and taking the total billion-dollar UK tech start-ups to count to 77.

Fintech, AI and Clean Energy Leading the Trend 

UK-headquartered fintech business raised approximately £4.1bn last year, which was about 7.5 times of the investment raised by France-based fintech and around three times of Germany based fintech firms. Also, the investment in fintech firm has doubled from 2018 to 2019 and ranks it second after the US in fintech investment.

Since centuries, Britain is known for its strength in financial services, together with world-leading policy and regulation such as Open Banking and FCA Fintech sandbox have extended support in building world-class fintech eco-system in the UK.

Fig 3: VC investment in the UK by tech subsection (2014-2019). 


Source: Tech Nation
 
Investment in Artificial Intelligence businesses soared to £2.5bn against £2bn reported in 2018; also, this was twice the investment secured by Germany and France based AI firms.

While investment in clean energy-focused tech firms leapt up by 73% in 2019 and almost hit a billion-dollar, the growth rate was almost double to that of China’s at 37%; meanwhile, US cleantech investment shrunk by 36% in 2019. However, Sweden had the highest growth in this space with investment surging by 1300% to £1.13bn from just £80m in 2018. The clean energy market is a relatively smaller market.

The record investment in the UK R&D, artificial intelligence and clean energy growth together with supportive regulation to foster innovation is enabling the country to build a tech ecosystem that can match up with global tech power hubs such as US and China.

The UK could replace China in 2020
According to the latest report of UK Government-backed Tech Nation, it predicts that if the UK and China see the same changes they had in 2019 ( where the UK witnessed a 44% jump, and China contracted by 65%), then it could topple China from the second position only behind the United States.

Fig 4: Projected VC investment into tech companies by country from 2020 to 2022


Source: Tech Nation

The forecasted data also suggests if the EU region and the United States will have some changes in tech investment for the next three years to 2022 as they had between 2018 and 2019, Europe will swap US position as the top tech centre for investment in the world. Let us now look at some of the emerging trends in this sunrise sector.

Emerging Sectors
 

1. Healthcare: Robotics uses are edging up higher year-on-year in the healthcare space in the UK, primarily in surgery. The NHS’ use of robotic devices is increasing year-on-year. Further, the use of AI has been hugely successful in the UK. UK based ClinspecIDX is the world's first company to conduct the first AI Blood Test, which will enhance the detection of brain cancer and provide early treatment and save lives. 
 

Also, the IoT smart devices such as smartwatches have seen playing crucial support when the user meets with an accident or dangerous crash. Moreover, the breakout of COVID-19 virus which has infected more than three million people world-wide will open enormous opportunities for AI-based R&D in the finding out new vaccine and technological advancement of the global healthcare system to prevent any future pandemic.
 

2. Education and E-learning:  The global expenditure on education and training from parents, individuals, governments, and corporates have been surging significantly, and this industry is expected to become a ~$10T industry in the next decade. In the era of fast and affordable internet, applications of advanced educational technologies are emerging strongly; also, AI is becoming increasingly integrated into core education delivery and learning process. VC firms are pouring a lot of money into education technologies businesses.Further, the unprecedented emergence of novel virus (COVID-19) have put education technology on focus like never before. Schools, Colleges, Universities and other education institutions are shut since last two months across many countries around the globe, and this suddenly increases the demand for education technologies to curb the new virus from disrupting education.

3. Agritech: AI is essential for smart growth in agriculture and farming worldwide, with its potential to fix many issues with ease. Further, IoT devices are vital for growth and advancement in agritech. Availability of smart devices in farming will make it more efficient.
 

With the understanding of the emerging themes in place, let us now shift our focus to gauge how COVID-19 could benefit the UK tech firms.

COVID-19 – An opportunity for UK tech firms 

Coronavirus pandemic has many people realise, for the first time, the immense power of technology in facilitating aspects ranging from remote working to instant knowledge sharing. The lockdown days will definitely bring a paradigm shift in corporate's attitude towards tech-driven behaviour in long-run. For many tech companies, the spread of COVID-19 has become a boon, and they are ramping up their efforts to buck the trend.

With more people working from home, a new problem of cybersecurity has arisen, this will increase in demand for the company's firewall, antivirus protection and other security features.

Further, regardless of the chaos around COVID-19, new business opportunities for the global tech sector seem imminent. The human tragedy has trained corporates focus on potential revenue opportunities by adopting a two-fold approach. First, as business leaders are doubling down on technological solutions to the crisis more than ever, technology has emerged as a critical tool for both living and working. Besides collaboration tools that aid remote working, telehealth and robotics are also seeing a spike in demand.

Secondly, we believe the time is ripe for tech companies to crank up the innovation game. Suddenly, ample opportunities have emerged and there is going to be a massive disruption in the way the post-Coronavirus tech scenario will arise.
 
II. Investment Theme and Stocks under Discussion (SGE, LTG, KNOW and KWS)

Having understood the industry dynamics, let’s now look at the four stocks that are trending in the current situation.To assess the same, companies’ stocks are evaluated based on Discounted Cash Flow (DCF).


Fig 5: Relative performance of the stocks under discussion against FTSE 100 (YTD)


Source: Refinitiv (Thomson Reuters)