Investment opportunities in the fast-changing digital economy
Rathbones’ in-house annual investment conference took place recently at our offices in London. With insights from an impressive range of external speakers from the technology sector, companies that have grown through the innovative use of technology, and specialist fund managers, we considered how technology is changing the way we live as well as the implications for investing.
As Peter Berezin (chief strategist at research firm BCA) said, the challenge for investors is that technological shifts may not be obvious for 20 or 30 years and often depend on marketing and adoption to reach a critical tipping point.
The term ‘disruptive technologies’ was first used in 1995 by Clayton M Christiansen, a professor at Harvard Business School. It applies not so much to the initial invention but the point at which it is widely adopted and changes the market. The invention of the motor car was not disruptive – it took Henry Ford’s innovative use of mass production and the launch of the affordable Ford Model T in 1908 for it to cause a seismic shift in consumer behaviour.
Employment in a digital world
Oxford Economics, a research firm, has estimated that the value of the digital economy is already $20.4 trillion globally. Yet we are on the brink of massive further changes as mankind starts to realise the potential of the cloud, big data, the internet of things, robotics, 3D printing, nanotechnology and alternative energy.
Commentators argue that the technological revolution will ultimately be as transformative for the labour market as the industrial revolution was in the nineteenth century. As with the cotton weavers, swathes of jobs have already been lost to technology, but these have tended to be low-skilled roles. The next wave of technological change is likely to see some higher-skilled, white-collar jobs replaced by technology as artificial intelligence becomes a reality. Recent research suggests 47% of total US employment is at high risk from automation.
In industries where automation is an easy and cost-saving alternative, workers could face unemployment. Sales and administrative roles are often cited as those particularly at risk. Yet some business leaders disagree. For example, the CEO of Rightmove, Nick McKittrick, argues that there will always be a need for estate agents because of the importance of human interaction when selling a property. An agent takes away a lot of the time and inconvenience involved in the process, which an automated process cannot replace.
To date, technology has generally been good for productivity and prosperity. However, we explored how the labour market may develop in the future and the ultimate challenge that society might face if technology drives down wages and employment levels, causing standards of living to fall. Other mega trends that may be affected include urbanisation, supranational governance and geopolitics as well as the changing relationship between developed and emerging markets.
Big data: intelligence everywhere
According to industry experts, intelligent embedded devices are the future. Soon we could see smart technology throughout our homes, offices and cars, helping us to manage our lives more efficiently. There is an element of gimmick in the notion that your fridge can tell you when food is out of date – something we have managed to do successfully for ourselves up until now. Yet much of this new technology could save money for individuals, businesses and governments.
At the start of the year Google announced plans to buy Nest Labs, which produces a thermostat capable of learning user behaviour and working out whether a building is occupied or not. Air conditioning systems that use sensors to operate more efficiently will have obvious cost savings. Meanwhile, Hewlett-Packard is part of an organisation focused on embedding one trillion sensors across the globe by the end of 2017 to measure, study and communicate. Ambitious as it sounds, this project is on track.
The emergence of mobile internet is tied to this idea. We spend more time than ever before using our mobile devices – and not just making calls or sending text messages. Mobile internet browsing is a rapidly growing phenomenon offering huge potential for businesses that can supply their services through this medium. The cost of smart phones continues to fall, particularly across the developing world where there is still room for massive growth. The most successful companies are likely to be those that can adapt to our changing patterns of online behaviour.
Profits in the cloud?
Ultimately, the point of the conference was to inform our investment managers about technology’s transformative potential and how they might invest to take advantage. Is it better to invest directly in technology companies, trying to identify the next Facebook? Or do technology funds, which have specialist knowledge of the sector, offer better diversification against inevitable corporate failures in this high-risk area?
Cloud computing is already a key theme for those investing in the technology sector, including specialist fund managers. Typically, organisations can reduce their IT energy consumption by up to 90% when they switch their IT infrastructure from a traditional mainframe to hosting on the cloud. This cost reduction is one of the last remaining areas of growth in the technology area.
One of the key conclusions that emerged from our conference is that the technological revolution will be so far-reaching that companies in every sector can benefit from falling costs as the internet commoditises the world. Some of the best ways to invest in technology may be through non-technology companies.
The implications of technological change are likely to be far-reaching. For example, Bolivia contains 50% to 70% of the world’s lithium reserves and has been benefiting from the global battery boom. Could South American’s poorest country become to the lithium markets tomorrow what Saudi Arabia is to oil today? The extraction and supply of scarce resources is likely to have geopolitical consequences too.
The UK is particularly well-positioned to participate and benefit from technological changes. Tech City in East London is now the third-largest technology startup cluster in the world after San Francisco and New York City. Cisco, Facebook, Google, Intel and McKinsey & Company are among the companies that have invested in the area. Many of the UK’s businesses are world leaders in the digital economy and they enjoy strong intellectual property rights.
Although fund managers are excited about the opportunities, they remain cautious owing to the uncertainty of developments. Substantial changes and innovations in technology tend to suffer from hype and often ridicule before they prove their worth. As Warren Buffet noted: “Beware the investment activity that produces applause; the great moves are usually greeted by yawns.”
Industry experts and specialist fund managers explored how technology is changing how we live and invest at Rathbones’ in-house annual investment conference:
Disruptive technologies: a global overview Peter Berezin, Chief Strategist, The Bank Credit Analyst, BCA Research
Insights from Silicon Valley Walter Price, Technology Portfolio Manager, RCM – Q&A with David Coombs, Head of Multi-Asset Investments, Rathbones
Digital disruption Nick McKittrick, Chief Executive Officer, Rightmove
Threats and opportunities for technology investors Stuart O’Gorman, Director of Technology Investment, Henderson; Ben Rogoff, Technology Director, Polar Capital – Q&A with Elizabeth Savage, Head of Research, Rathbones
Big data and the cloud Ron Brown, Chief Technologist, Hewlett-Packard Mobile technology and the internet of things Ian Drew, Chief Marketing Officer, ARM Holdings