“The Future’s Bright, the Future’s Orange”– Mobile telephone advertising campaign 1994.
When mobile telecom company Orange created this strapline nearly 30 years ago (and does not that make me feel old!), it will have had no idea quite how integral to our everyday lives that mobile telephones would become. As technology and computing power have metamorphosed then so has the role of the "humble" phone in our pocket.
It is a truism that some of the greatest innovations are inherently simple - at least they are simple with the power of hindsight. Whilst pre-historic man invented the wheel, I can vividly remember my parents struggling with bulky, heavy, holiday suitcases. The first "wheeled" luggage was invented in 1970 (a year after we had put a man on the moon!!) by Bernard Sadow but he simply put a wheel on each corner. It was not until 1987 that a US airline pilot Robert Plath affixed two wheels and a long handle to suitcases that rolled upright, rather than being towed flat. It is a pity he did not create the equivalent of the cycling proficiency test for users at the same time....
My grown-up children can scarce believe that there was a time not that long ago, that if you were not in a certain place at a certain time then you missed that TV programme that you were so keen to watch. No second chances, no "catch up" or immediate access "box set". And, to think, it was not that long ago (2020?) when we thought nothing of sitting in the waiting room of a doctor's surgery surrounded by "ill" people before receiving a consultation with our GP...if we could get an appointment that is!?
The COVID-19 pandemic has generated significant turning points, with shifts across almost all societies and economies. It has exposed tensions and weaknesses in the global systems – but also shifted policy and behaviour in ways that open new possibilities for the future.
There will be different recovery objectives at the front of people’s minds – the recovery of economic strength, the recovery of a sense of security and the recovery of a sense of well-being. These different objectives form the driving forces of the years ahead. People will be seeking all of these to some extent – wealth, security, and health. But what they choose to prioritise may differ.
Over time, attention will turn from short-term recovery to long-term resilience, the capacity to survive, adapt and grow in the face of change and uncertainty. The current crisis may provide a window of opportunity for the deep changes distinct to transformative resilience – the ability to transition deeply to thrive in new circumstances. And with this has come the rise of "Thematic" investing.
I have already touched upon what are known as "mega-trends" in previous "A view from the desk" pieces, but the aim of this one is simply to introduce you to what we view as many of the major themes now in play within both society and the investment world alike. It has been technological innovation and revolution that is at the heart of this and whilst I shall run through some specific themes, the reality is that these overlap and do not run parallel to each other. For example, it is the power of the semiconductor (aptly described as "the Brains of Modern Electronics") as an essential component of electronic devices that is enabling advances in communications, computing, healthcare, transportation, clean energy, and countless other applications.
Thematic investing means a lot of different things to different people. COVID-19 has only increased interest in the thematic world as investors have weighed up the powerful mega-trends arising from the pandemic. At its heart, thematic investing is a less linear approach looking at entire eco systems that are changing/disrupting our behaviours. History may then be of little importance as guidance, which often leaves traditional measures of value at odds with the future prospective investment returns.
We need to try to understand change and patterns of individual behaviour that emerge from this as consumers are adopting market innovation faster than ever before. The amount of time that inventions take from commercialisation to adoption (as measured by 25% "take up") is reducing dramatically. From the invention of electricity in 1873 to 25% adoption it took 46 years; it took 26 years from the first televisions in 1926; 16 years from the creation of the PC in 1975; 13 years for the mobile phone (from 1983) and 7 years for the internet from 1991. The smartphone came into existence in 2007 and it had 25% adoption within just 4 years.
Change is here to stay, and companies must adapt to this change. The last year has also seen extraordinary change to society and business, including in how intelligence is organised. In business, the shift to much more online working, learning, shopping, and interaction is set to leave lasting effects. In government, data and knowledge have been used in quite different ways, for instance, to manage the COVID crisis and responses in Korea, Singapore and Taiwan have been vastly different compared to the UK, Europe or US. Meanwhile, there has been an upsurge in new methods to predict and plan everything from infection rates to economic impacts.
I recently listened to a talk by Sir Geoff Mulgan who is a Professor of Collective Intelligence, Public Policy and Social innovation. He posed a series of questions that cut to the heart of thematic investment and the methods, lessons and implications for business and investors: -
What will return to normal?
What will change forever?
Which parts of the world will bounce back fastest?
What long-run trends will intensify?
He also said, quite tellingly, that "There are no experts on the future"......
So, what are the themes we are looking at? Many of these will be familiar to you and others, perhaps, less so.
By connecting billions of everyday devices to the internet, the internet merges the physical and online worlds, opening new opportunities and challenges for companies, governments and consumers. This has such significant implications for everyday life. In retail the internet is changing the way we shop for good. Who has not received an Amazon parcel or such like? In 2020, 87% of UK households made online purchases whilst in the US e-commerce now accounts for 21.3% of total retail sales (2020) up from 15.8% in 2019 and 14.3% in 2018. These trends are global with the likes of Mercadolibre ("the Amazon of South America") coming to the fore.
Consumers now buy more entertainment on-line than anything else, and this is particularly important amongst "Generation Z" (born in the late 1990s and early 2000s) and "Millennials" (born c1981-96) who are the biggest consumers of this, and are driving the success of brands like Netflix, Disney+ and Spotify.
The internet has also facilitated "working from home" - essential during "lockdowns" but also perhaps signalling an irreversible shift in working patterns. This poses further questions such as will city centres revive?
Alongside the Internet of things has been the growth in Cloud Computing. This is revolutionising virtually all communication, work, and business processes. New services are helping to create a billion-dollar market and securing numerous benefits for companies. This is another inter-connected theme that we must consider investing in.
And to complement these we must also turn our collective minds to the thorny topic of Cybersecurity. This can be easily identified as the standout trend shaping the security industry amid a series of high-profile cyber incidents due to backdoors or flaws in security equipment. With the problems come a range of solutions as cybersecurity firms seek to stay one step ahead of the criminally minded.
Favourable changes in public opinion and economic fundamentals are likely to bring major benefits to the Clean Energy industry, as costs relative to traditional energy sources have declined dramatically. It is also a reflection upon a worldwide energy consumption set to rise by perhaps 50% by 2050. We will also see growth in the global population such that it is likely to rise from 7.7billion in 2019 to 11.2 billion by the end of the century. All governments and regulators have changed the emphasis to focus on renewable energy, and improvements in technology have enabled cheaper production of such renewables.
In the US, the new Biden Administration will support clean-energy and tech far more than past presidencies. We expect future cars to be a key winner, benefiting from likely subsidies, making Electric Vehicle (EV) cars more affordable and a fast-growing technology trend for 2021.
This feeds into another important theme, that of the Battery-Value Chain. Until recently, mass adoption of Electric Vehicle (EV) technology has been concentrated primarily in the small vehicle category, targeted at reducing the numbers of the highly polluting two and three wheelers ubiquitous in Asia’s cities. Through a system of subsidies to encourage mass adoption of these EVs, China has sought to improve air quality throughout its many bustling city-centres. Policies encouraging adoption of more sustainable behaviours are beginning to shift from incentivising consumers to regulatory enforcement, although the economic impact of COVID-19 has resulted in countries temporarily prioritising economic recovery. Furthermore, pressure to conform to more socially responsible practices is becoming increasingly mainstream.
Whilst China has led adoption of EVs and battery technology in recent years, European consumers and manufacturers are now rapidly turning to EVs, catalysed by incentives seeking to boost economic activity. Tesla remains the global EV standard bearer despite low adoption at home in the US, partly due to the Trump administration’s policies to protect the interests of the Internal Combustion Engine. EVs are generally regarded as ‘green’ technology, however the supply of mineral ingredients for batteries is likely to give rise to new sustainability challenges.
You will see reference here to "green" and "sustainability" and these feed into another area of thematic investing, widely promoted and written about at present, in the shape of Environmental, Social and Governance (ESG) reporting. ESG investment is a huge topic covering the likes of boardroom standards to the environmental impact of investments. I have heard ESG described as "doing the thing right" whilst Impact Investing is "doing the right thing". Thankfully, Peregrine & Black have our own Head of Responsible Investment Solutions in the shape of Chris Redman who has over 20 years’ experience of investing within the ESG space (long before it became fashionable!) and he will be giving us a more in-depth perspective of the sector in the next "A view from the desk".
Machine learning, Artificial Intelligence (AI) and robotics will also see increased adoption as worries about worker health and costs drive manufacturers in the US to automate. This is also due to onshoring of more manufacturing, away from the likes of China. Meanwhile China is adopting an increasingly self-reliant tech industry based on 2020 US sanctions suffered by its leading players in 5G and telecommunications.
The 5G theme will represent the technological innovation and infrastructure that will likely support the next era of connective technology. Potentially positively impacting diverse industries across Virtual Reality, Healthcare, Cars and Manufacturing, its adoption can transform work practices and our daily lives. As 5G speeds go up by 10 times and reliability improves then the number of new devices goes up by 100 times. We are already seeing more of a trend of people dealing directly with machines rather than people to people and if this growth is to continue then all services will need to be connectivity enabled.
5G is the key building block for a new wave of innovations, including the Internet of Things, Robotics, Artificial Intelligence and Autonomous Vehicles, leading to explosive growth in global economic activity. Structural shifts to remote work, online education and virtual health are driving strong demand for 5G connectivity and the pandemic has simply accelerated these trends.
The pharmaceutical and biotechnology industry produces drugs that enable people to live healthier lives, recover from injuries, and fight diseases. As a theme this is often categorised as Healthcare and Medical Innovation. Healthcare is still one of the least digitised industries, but due to the abundance of data and developments in data analysis (from powerful AI) and the connectivity I discuss above, there is a sea change coming in the sector to boost positive "patient outcomes".
Look at tele-medicine. COVID has been an accelerant but it has moved not just to consulting on infectious disease but over 55% of appointments in the US in 2020 have been mental health related. It is a more structural issue in society with technology producing a structural solution. The delivery of care is undergoing transformation with ease of use, employee incentives and insurance coverage all reasons behind rapid adoption.
Genomic medicine enables the modification of the building blocks of life, promising new drugs for a range of diseases. We only need look at the speed at which COVID vaccines have been developed to illustrate this with, for example, the mRNA vaccine design using genome sequencing. Robotic surgery will expand the potential in general medicine for minimal invasion and increased precision on the operating table. This will also help reduce surgical complications and shorten hospital stays.
Blockchain and cryptocurrencies are a high-profile theme at present with the likes of Tesla moving cash into crypto currencies as a store of value. Blockchain is a highly practical solution to the problem of storing, authenticating, and protecting data - you can think of blockchain as a decentralised, extremely secure database. In this way, it is the technology that enables the existence of cryptocurrency, whilst a cryptocurrency is a medium of exchange (such as the pound or the dollar) but is digital and uses encryption techniques to control the creation of monetary units and to verify the transfer of funds.
I am a shade relieved, to be honest, that we are not authorised to advise on the merits of cryptocurrencies but we are fortunate that we have a sister-company (Global Block) that can do so, should you have an interest in this more esoteric space. One additional thing to keep in mind, though, given the other inter-locking themes I have discussed, is last week's BBC reporting of a Cambridge University study that indicated that "Bitcoin uses more electricity annually then the whole of Argentina"!
There are so many other themes and sub-themes that I think it probably makes sense to draw this "A view from the desk" to a close now. The likes of next generation food, e-learning and, in particular, the rise of China are perhaps deserving of a letter of their own and might well get one before too long. However, I would just like to mention the rise of one other "sub-theme" that draws on many of the themes I have described and that is Video Gaming and Esports.
More people around the world are turning to interactive games as a form of entertainment. Digital game sales are continuously breaking records, and industry revenues have continued to hit all-time highs for the last few years. Esports is a form of competitive video gaming which has taken hold around the world, with ballooning cash prizes and front-page news coverage. With the money it generates I wonder how long it will be before it features as an Olympic sport? If golf has a place, then surely it will not be long! In-game concerts and events are drawing millions of people into their favourite game’s universe, blurring the line between the game and live events. The growing popularity of gaming, along with the revenue potential across the industry, help make this industry a potentially compelling investment opportunity.
Global technology trends and themes are shaping and re-shaping the world around us. All areas of business, healthcare and ecommerce are adopting innovative technologies to improve efficiency, performance, and cost.
The growth of digital infrastructure and the rollout of 5G which will provide faster speeds, lower latency and overall a better user experience, will aid the rapid growth of technology mega trends as businesses move away from traditional IT models to include cloud computing and remote services. We are already witnessing increased use of technology in the healthcare industry.
We only need to look at the success of the likes of Amazon for evidence that the prize for getting disruption right is an attractive one. We need to continue to look for companies and sectors to invest in that are evolving, improving, progressing and adapting.
Graham Withers – Head of Discretionary Investment Management February 17th, 2021