Intelligent robots, solar and wind energy generation, ‘designer’ drugs and Blockchain technology are four of the biggest potential disruptive technologies on the horizon, according to Rathbones, although it warns investors to carefully decipher between ‘disruption’ and ‘innovation’.
This is the crux of a recent report written by several members of the Rathbones team, including chief investment officer Julian Chillingworth, entitled ‘How soon is now?’. It focuses on the potential upside and the pitfalls of new technologies - many of which are widely under-researched by the broader market – on investors’ portfolios.
“This isn’t about airy futurology-style projections; as investors, it’s imperative we understand how even for those companies at the forefront of technological change, investment success is not guaranteed,” Chillingworth warned.
“While innovation is a facet of disruption, they are not the same thing, and this misunderstanding can be a sure-fire way to destroy wealth. While some market leaders can innovate and introduce new technologies, and the existing model survives, we have focused on markets and sectors where the status quo could change radically or is under threat.”
In the below article, co-authors of the report focus on four new technologies set to significantly change the operation of the global economy, and how this could impact investors.
‘Designer’ drugs
Mona Shah, head of collectives, says personalised medicine is set to become commonplace in clinics across the globe in a shift towards using so-called ‘designer’ drugs.
“Personalised medicine could disrupt every part of the healthcare sector, from R&D and clinical trials, to diagnostic testing, regulation, healthcare provision and insurance,” she warned.
Performance of indices since start of data
Source: FE Analytics
“Governments can achieve greater efficiency in healthcare while improving success rates for patients by embracing personalised medicine.
“A key challenge will be the storage and analysis of the huge quantities of patient data. While these are early days for this investment theme, personalised medicine accounted for $94bn of sales in 2015, and this is expected to rise to $178bn by 2022.”
Shah says pharmaceuticals with strong pipelines in personalised medicine such as immunotherapy look well-placed to “strike the genetic jackpot”. She says the biggest winners from personalised medicine are likely to be the healthcare insurance companies.
“However, to maximise their profitability, they need to transform their business away from the concept of ‘shared risk’, which is central to their existence today,” she added.
Intelligent robots
Despite widespread fears that intelligent robots will replace the need for ‘white collar’ workers and put the future of capitalism at risk, Rathbone’s asset allocation strategist Ed Smith says a robot-fuelled dystopia is decades away.
“The risk to most jobs from automation is low for the foreseeable future, but history does suggest that the trend is likely to affect particular groups of mid-skill workers, possibly concentrated in particular regions,” he explained.
“As a result, greater income inequality could exacerbate social and political tensions – in other words, the potential for technology to ignite further populism is high.”
As such, Smith says the social and economic benefits of technological progress need to be articulated clearly by experts. He also says politicians need to minimise the impact of change on certain working and socio-economic groups.
“On the other hand, investors concerned about secular stagnation or the impotence of monetary policy to deal with the next recession should welcome the age of automation, for it appears that it is likely to exert a net upward pressure on the structural rate of interest appropriate for the economy,” he reasoned.
Energy storage technology
The continual improvement of solar and wind energy generation, as well as energy storage, could have a significant impact on the utilities sector over the medium-to-long term, according to head of equity research Sanjiv Tumkur. He also says electric and driverless vehicles could harm utilities and car manufacturers.
“Through advances in battery storage technology, we are on the cusp of major changes for electric vehicles and alternative energy, and ones which will emerge much more quickly than the market currently expects,” Tumkur said.
Performance of indices since start of data
Source: FE Analytics
“The private sector will need to respond: these changes are likely to be disruptive to utilities – with the ability for homes to go ‘off grid’ – and car manufacturers. Less reliance on fossil fuel consumption could also have significant geopolitical implications.”
While firms that manufacture or supply materials for batteries, solar cells or wind turbines might do well in theory, the head of equities warns that rapidly-growing markets could cause falls in unit prices, which could in turn lead to many companies in the sector going bust.
“The battery revolution is underway, and we will be monitoring developments in order to identify the winners and, perhaps more numerous, the losers,” he said.
Blockchain technology
Dubbed ‘the internet of value’, Chillingworth and risk analyst Jakov Agbaba say the impact that blockchain – an alternative to record-based transactions – could have on technologies that underpin much of the financial ecosystem need to be closely monitored.
“Blockchain offers an alternative to many transactions, from money transfers and asset custody to ‘know your client’ checks, healthcare records and music downloading,” they explained.
“It would release huge cost savings and create additional value, but could negatively impact employment levels.
“In 2015 and 2016, venture capitalists invested around $1bn in the development of blockchain. The banking industry is expected to spend around $400m by 2019. Wide-ranging uses of blockchain are being tested in many other industries.”
Supporters of the technology argue that blockchain is more innovative than it is disruptive and, to a certain extent, Chillingworth and Agbaba believe they are correct.
“There could be significant improvements in the areas of cross-border payments and healthcare provision, but some companies will inevitably suffer disruption,” they said.
“In such cases, blockchain may prove impossible to adopt. These businesses will either have to readjust their offerings, which can take both time and resources, or face closure when other providers offer similar services at far lower cost.”
Overall, Chillingworth warns that passive investors run the risk of holding a portfolio of “canal operators just as the railway companies are about to take off”.
“Whichever approach investors take, disruptive technologies could have a disastrous effect on investment portfolios, as whole sectors are at risk of obsolescence,” he concluded.
“While this is not the place to rerun the active versus passive debate, active portfolios can more easily invest in the leaders of tomorrow. Further, while the UK has historically lagged the US in exploiting the commercial benefits of technological innovation, we believe it is now well-positioned to benefit.”