Technological innovation has reached a pace never seen before. The challenge for today's investors is identifying and navigating its full implications.
Technology and economic growth
In recent years, most economies’ growth rates have remained at historically low levels, despite apparently rapid technological change. With fears of “secular stagnation”, where no growth becomes the norm, could this progress impact growth?
At a micro level, almost certainly “yes”. The speed of technological change now appears to be accelerating. Many emerging technologies will make a major difference to the practices and efficiency of existing industries and services. Add to this the effect of ever-increasing volumes of data and you have a recipe for accelerating productivity growth in certain sectors.
At a macro level, the overall impact of technological change on global economic growth over the long term will be positive. But over the short and medium term, there will be minuses as well as pluses. Job losses in certain areas could be severe and disruptive for whole economies in terms of their relative competitive position, welfare provision and public finances.
Connectivity and integration
The growth of the Internet of Things (IOT) has redefined connectivity. Homes, watches and cars are all becoming smarter, allowing consumers to remain connected in a variety of ways.
According to research firm Gartner, the number of connected devices worldwide will grow by 31% in 2017, reaching ~8.4 billion. They also estimate that ~127 devices are put online every second, with the total number online surging to ~20.4 billion by 2020. Adoption speeds for new technologies have also accelerated, with McKinsey & Company estimating that ~15% of all cars will be self-driving by 2030.
Investment and research in technological innovation has primarily been driven by the largest technology companies, who have begun integrating these technologies into their operations. For example, Google’s DeepMind, an artificial intelligence system, applied “deep learning” to a number of BBC programs and created a lip-reading system that was more accurate than a professional lip reader. Google also applied DeepMind to improve their energy consumption in data centers and by allowing the “smart” computer to monitor and control energy usage, they have been able to reduce their energy used to cool their computers by ~40%. Amazon, another tech leader, has opened a pilot grocery store that utilizes sensors to identify items in shopper’s carts, effectively eliminating the need for checkout lines.
Unlike past breakthroughs, where growth has largely been contained to the technology sector, today’s innovative technologies are causing significant change in every sector. Investors will need to gauge the impact potential of these technologies to identify opportunities and avoid areas that may be negatively affected.
Outlook and four key factors
While the barriers to widespread adoption are significant, several industry trends are expected to make further integration less challenging:
The costs to create and run these technologies are significant right now. However, widespread adoption will push costs lower. For example, prices for sensor lasers used in self-driving cars have decreased by 1,000% over the last eight years, and are forecast to decrease by another 6,500% over the next few years.
Artificial intelligence (AI) technologies rely on previous experiences (i.e. data) but the scarcity of data severely limits how these technologies can be used. Increases in adoption will also increase the amount of data available, unlocking the potential for additional applications.
Global aging, millennials and other demographic shifts should create demand for innovative technologies. Companies like CareSkore, IBM and Zephyr Health are analyzing healthcare databases for new insights into medical research and care. Doctors have already begun performing robot-assisted surgery and some medical devices now transmit patient vitals automatically.
The global economic potential of these technologies has accelerated investment. Funding for AI startups surged to US$1.74 billion in Q1 2017, an increase of 85% from the same period a year ago. McKinsey & Company estimates global, annual spending on the IOT will be US$4-11 trillion by 2025.
A global spike in unemployment – AI and robotic automation have the potential to replace many of the world’s low-paying jobs. A recent report by McKinsey & Company estimated that ~50% of activities, consisting of ~US$15 trillion in total wages worldwide, could be automated.
Negative disruption to entire economies – Widespread automation, for example, could cause countries that are dependent on manufacturing jobs to lose their relative advantage (i.e. cheap labor), likely lowering demand for shipping containers and other export products too.
Companies risk irrelevance – Failing to adapt to changing technologies could cause companies, and potentially entire sub-industries, to become irrelevant. For example, Blackberry’s CEO delayed investment in smartphone apps as he believed they were “a fad”. As a result, Blackberry fell behind and is no longer a major player in the smartphone industry (market share is .04% today).
Despite the potential risks, economies have historically adjusted well to past disruptive technologies. In fact, one third of new jobs created in the US over the past 25 years were in positions that did not previously exist.⁹ According to a 2011 report by McKinsey & Company, the internet “destroyed” ~500,000 jobs in France over the previous 15 years but created ~1.2 million jobs in the same period.
We believe governments and educators should take an active role in encouraging current and future employees to acquire the skills necessary to succeed in the business world of tomorrow. As economies become increasingly technology-dependent, data scientists, computer programmers and other technology-reliant positions are expected to see a significant uptick in demand.
As the speed of technological innovation accelerates, active investing will become increasingly important as managers will need to swiftly identify potential “winners” and “losers” of emerging technologies.
Merely being in the space does not automatically translate to better performance. Market participants will need to identify the “leaders” and “followers” within these new trends as well as the potential risks these technologies present to wider economies across the globe.
Information Technology has been our favorite sector for some time, and despite being the strongest performing sector YTD, we find no need to alter our view. Industry leaders investing in finding new and ground-breaking technologies, combined with the multiple avenues from which these companies derive revenues, should allow them to continue to drive growth and innovation in the sector.
Additionally, the sector remains attractive from a relative valuation perspective as it is near its long-term average relative forward price/earnings (P/E) to the S&P 500.
Edited from CIO Insights Special: Tomorrow’s Tech Today, produced in September 2017.