This has clearly been a remarkable year. It has been an enormously difficult year in so many ways for so many people, a year of deep human tragedy and profound economic challenge.
It has forced us to change our habits. We have adopted online shopping out of necessity, we are streaming more, and businesses have accelerated their digitisation plans to facilitate working from home.
One of the key questions now is whether these changes are permanent, and what this means for the economy, or whether we shall revert to old habits, longing for our “analogue” days.
Of course things will normalise to some extent. It is probable that we will see a boom in leisure and consumer spending when the economy fully opens again. Indeed, as one fund manager put it to me recently, we may see a “hedonistic binge” as we shake off the shackles of lockdown, adopting a “carpe diem” attitude to life.
One should remember that the Roaring Twenties happened after the Spanish Flu epidemic of 1918 to 1920. Some things have changed, however.
For years now, we have felt that the world economy was at the start of one of the greatest transitions in history. We felt the technology was in place to usher in an era of profound disruption across the economy, with sectors ranging from energy, agriculture, transportation and communications likely to be revolutionised.
Some readers may challenge the assertion of revolution, but history tells us we should expect economic revolution. Over the past few years, we have leaned heavily on the work of several historians and academics to inform our thinking, for example the work of Professor Carlota Perez and Tony Seba, and we believe with some conviction that we need to position for revolution.
To expand on these examples, Perez’s framework tells us that technological revolutions happen in phases and that the current technology revolution has its roots in the early 1970s at the start of the information and communication technology age. She characterises the period from the early 1970s to the late 1990s as the “installation period” of the current revolution, when the foundation was laid for the innovation that we see today and hopefully the collective prosperity ahead.
She further contends that we are at a turning point or crossroads, following the financial crises of the 2000s and that we are potentially at a start of “deployment period” when the technological advances of prior decades get deployed for greater society, yielding advances in productivity, stronger growth and reduced inequality.
This is, of course, a tantalising prospect and perhaps seems fanciful. It feels intuitively right, however. Just think how technology has enabled us to keep communicating with our loved ones, enabled businesses to continue to operate, and in some cases prosper, during a remarkably trying time. This would have been impossible ten years ago. It seems logical that, if deployed in the right way, technology can really boost productivity and growth.
Furthermore, history shows that we have been through these transitions before, ranging from the Industrial Revolution to electrification. Whilst we face many challenges today, especially societally and politically, Perez’s work shows us that there is precedent to support an optimistic view.
Tony Seba’s work is equally enthralling. During the summer, Seba, with his colleague James Arbib at RethinkX, produced a fascinating book called Rethinking Humanity.
I have always found Tony Seba prescient in “predicting” technological disruption and the book certainly did not disappoint. The economic, societal and investment implications from their conclusions are truly epic.
To quote from the piece, they conclude: “We are on the cusp of the fastest, deepest, most consequential transformation of human civilisation in history, a transformation every bit as significant as the move from foraging to cities and agriculture 10,000 years ago.” Epic feels like an understatement.
I found that the challenges we see today are much better understood when we understand the shifting tectonic plates of technology discussed in the book. The authors discuss the amazing opportunities, challenges and risks we face over the next decade, with the tantalising prospect of an “age of freedom”, if we overcome the many obstacles we see today.
There are also clear investment implications from the book. The authors conclude that during the 2020s the five foundational sectors of the global economy (information, energy, food, transportation and materials) will be completely disrupted.
Whilst these arguments are not new to us, the scale and pace articulated in the book really struck me. The authors argue that this is not another Industrial Revolution, but a far more fundamental shift. The clear implication of this is that many traditional 20th-century business models will continue to struggle, while the leaders in new industries thrive.
It is this contention, along with Perez’s suggestion that we could be entering into a technology-driven “golden age”, that brings me back to the purpose of this article.
That is, to consider the economic implications, and then the investment implications, of the accelerated technological change that we have seen this year, and what we are likely to see in the coming years.
In the short term, the businesses best positioned for technological change have performed extremely well. You need only look at a chart of Amazon’s share price to see this.
Indeed, the outperformance of leading technology-driven businesses is such that we would not be surprised see a short-term reversion of the 2020 trend, with the outperformance of more capital-intensive, cyclical businesses for a period, in anticipation of further economic recovery.
In fact, at the time of writing, this is exactly what we are seeing, with the energy and financial sector performing strongly.
However, if we look ahead to the balance of the 2020s, it seems we are only in the foothills of technological change and disruption. Over the next decade we are likely to see the creation of trillions of market capitalisation for businesses that capture new markets and lead innovation, and we are likely to see the demise of businesses that cannot adapt.
In saying this, I also feel it is important to stress that identifying the potential change ahead of us and investing successfully through this period are two distinct challenges.
The companies that forge ahead and break new ground are not necessarily going to be good investments, while many seemingly dull businesses that don’t capture investor imaginations could thrive and deliver excellent returns, as they adapt to the changing landscape.
What is clear to us, however, is that technological change is accelerating, and history tells us that we tend to underestimate exponential change. Most of us understand the world is changing but we fail to grasp just how fast it is.
We believe that across many industries, the seismic events of 2020 have “lit the torch paper” on exponential change. Of course, we shall revert to many of our old habits, but the world now better understands the power of technology and digitisation.
2020 has accelerated trends that were already in place and we are not going back. The investment implications are likely to be profound.
Ian Quigley is head of investment strategy at Brewin Dolphin Ireland