Technology: The Big Disruptor
Identifying companies set to benefit from technological change will be a major driver of future investment returns. Avoiding the losers will be just as important.
From self-driving cars to 3-D printers; robots that can teach themselves to drugs that use the body’s immune system to fight cancer, there is no shortage of technological advances that could revolutionise the world and transform the lives of millions.
But while this rapid pace of technological change offers a wealth of exciting investment opportunities, it also presents a major headache. Get your technology and company picks right and you stand to generate healthy returns. Get your calls wrong, however, and returns could nosedive.
All of which begs a number of questions: which of the new technologies promise to have the biggest impact on which sectors; which companies are best and worst placed to succeed within those sectors; and how can investors keep abreast of the latest technological advances and the ways in which they are likely to affect industries and individual companies, for better or worse?
Max Burns, Senior Research Analyst, believes it is critical to identify long-term trends early. He is especially excited by the development of ‘co-bots’ – robots capable of collaborating with humans on the factory floor.
“Co-bots represent a sea-change in manufacturing. This is a significant long-term trend that will play out over many years. It’s going to be exceptionally more efficient,” Burns says.
To date, companies have struggled to automate processes that require any degree of human involvement due to safety issues. But advancements in artificial intelligence and machine vision mean these new type of robots can be made aware of their surroundings and react to the movement of humans while performing their assigned tasks.
Co-bots are so new they account for just a fraction of global industrial robot sales: less than five per cent of the record 240,000 sold last year. But that looks set to change. At an average price of $24,000, according to research from Barclays, these smaller robots have the potential to revolutionise production. That is especially so for smaller companies, which account for 70 per cent of global manufacturing but have struggled to automate given the high price of traditional robots.
Barclays estimates the co-bot market could grow from just over $100 million in 2015 to $11.5 billion by 2025. While it is still too early to know precisely which industries will be most affected, Burns believes Swedish-Swiss engineering group ABB and Japanese rival Fanuc, as two of the world’s top three robot makers, are well placed to tap into what he expects to be surging demand for these new machines.
According to Global Equity Fund Manager Giles Parkinson, this is just one more reason to favour Fanuc. “Fanuc is to factory robots what Microsoft is to PC software. Its track record for innovation is so strong, and that has always been a good reason to back the company.”
Burns’ view on the importance of accurately assessing the key long-term trends is shared by Scott Schimpf, Senior Analyst. While the pharmaceutical industry is facing increased scrutiny on pricing practices, particularly in the all-important US market, Schimpf believes the development of innovative therapies such as revolutionary new cancer treatments means some companies are better placed to withstand the storm.
Immuno-oncology is a new class of treatment that harnesses the immune system to destroy tumours. Schimpf says that because of the immune system's unique properties, these therapies offer a “paradigm shift” in the war on cancer: fighting it more powerfully than existing drugs; offering longer-term protection against the disease; having fewer side effects, and benefitting more patients with more types of the illness.
“It promises to be a game changer but only a few companies are leading the charge to take advantage,” says Schimpf, citing Merck, Bristol-Myers Squibb and Roche/Genentech as companies that currently dominate this field.
Parkinson, meanwhile, is impressed by the level of innovation at Zoetis, the animal-health business spun out from Pfizer in 2013.
“It’s a wonderfully innovative company. But what really appeals is the low risk of this innovation. To a certain extent, the research can piggy-back off discoveries in human drugs,” he says.
It requires substantially less time and resources to develop a new animal drug as fewer, shorter studies are conducted directly on the target species earlier in the process than with humans. An animal drug is typically commercialised in six years; half the time for a human drug, and costs tens of millions of dollars to develop rather than billions.
However, just as some companies stand to be big winners as a result of these new technologies, others that are slower to adapt will inevitably head for trouble. One only has to think of what happened to Eastman Kodak and Blockbuster Video to understand just how ‘disruptive’ technology can be for some. And from an investor’s perspective, it is every bit as important to avoid the losers as it is to pick the winners.
“We factor long-term structural challenges, such as technology risk, into our security- selection process more than ever before. Currently, for example, we have little exposure to automakers and car-parts manufacturers given the potential disruption to the industry,” says James Vokins, Senior Portfolio Manager, Fixed Income.
With capital so freely available, especially for large multinationals, there is a danger companies will be tempted to plough money into technology in order to maintain their competitive position, perhaps at the cost of financial prudence.
“Credit spreads suggest auto bonds are not priced for any material disruption in the industry,” Vokins argues.
The car industry is currently facing simultaneous threats on three fronts from US technology groups – Tesla, which is championing electric vehicles; Google, which is spearheading the development of autonomous vehicles; and Uber, which is looking to revolutionise the way people use cars.
In the middle of 2012, Tesla stunned its peers in the automotive industry when it started to ship a luxury electric vehicle that could go more than 300 miles on a single charge and reach 60 miles per hour in 4.2 seconds. One study by Bloomberg earlier this year claimed electric vehicles will become a more economic option than gasoline or diesel cars in most countries during the 2020s, helped by a big fall in battery prices.
Furthermore, it forecast that sales of electric vehicles will hit 41 million by 2040, almost 90 times the equivalent figure for 2015. That would represent 35 per cent of new light duty vehicle sales; up from less than one per cent last year.
Meanwhile, in 2010 Google developed the first autonomous car. At the hit of a button, the car would drive in fully automatic mode on highways that are crowded and whose traffic flows are not always smooth and predictable. It is possible fully autonomous cars will be authorised to drive most US and European roads within ten years.
Uber, having launched its taxi-hailing app in 2009, wants to make ride-hailing so cheap and convenient that people forgo car ownership altogether. Not satisfied with shaking up the global taxi business, it has its eye on the far bigger market for personal transport.
According to Alessandro Rovelli, Senior Credit Research Analyst, these technologies offer potentially significant societal benefits: saving lives; reducing crashes, congestion, fuel consumption and pollution, while increasing mobility for the disabled. At same time, they pose an existential threat to the world’s motor industry – at least as we know it.
Automakers have responded in various ways. Some of the main global autos manufacturers are developing cars with “at least some self-driving characteristics”. As for electric vehicles, BMW, Daimler, General Motors (GM), Ford, Renault-Nissan, Volkswagen (VW) and others are already competing with Tesla, or will be in the next few years. And Toyota, GM and VW have taken stakes in Uber and its rivals such as Lyft and Gett.
“The implementation of these technologies is very expensive and the industry is already in the late stages of its current business cycle. This is going to favour the most capitalised players with adequate R&D budgets and a track record of innovation,” Rovelli says. He believes Daimler and Renault-Nissan are in a strong position to compete, whereas Aston Martin and Peugeot are likely to struggle.
The importance of being in a strong financial position to adapt to the disruption posed by new technologies applies no less to banks and insurers, according to Oliver Judd, Senior Credit Research Analyst.
Funding to venture-capital-backed ‘fintech’ companies is set to rise further in 2016, having last year more than doubled to a record US$13.8 billion, as investors look to tap into new technology providing online financial services from payments and lending to digital currencies and cross-border transfers.
US investment bank Goldman Sachs, itself a big investor in fintech companies, estimates the sector could snatch as much as $4.7 trillion in revenue and $470 billion in profit from traditional lenders.
However, Judd is sceptical emerging technologies will disrupt the financial services industry to the extent some predict.
“Banks are undeniably facing challenges from these disruptors. But it’s almost impossible at this stage to accurately gauge the extent of the challenge or precisely what that challenge is,” says Judd. “Incumbent banks are not going to simply stand still. And remember, a lot of these new technologies are actually going to offer established players an opportunity to grow profit substantially by stripping out costs and targeting new customers more effectively.”
Nonetheless, he concedes that companies in weaker financial positions will be at a big disadvantage if they are unable to invest heavily in the new technology.
So while there are numerous technologies that are set to transform the world, working out just how they are likely to affect the investment universe is far from straightforward. One of the keys to successful investment decisions, as ever, comes down to risk control.
“You’ve got to do your research,” says Burns. “But even more importantly, you’ve got to spread your bets. You’re unlikely to succeed by just trying to predict the next Facebook, which was a bolt from the blue.”
 Barclays Equity Research note by James Stettler, David Vos et al; published 15 Feb 2016
 Bloomberg New Energy Finance, Feb 25 2016: https://about.bnef.com/press-releases/electric-vehicles-to-be-35-of-global-new-car-sales-by-2040/
 The Pulse of Fintech, by KPMG and CB Insights: https://home.kpmg.com/xx/en/home/insights/2016/03/the-pulse-of-fintech-q1-2016.html
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