The last twenty years looks troubled when viewed through the prism of financial markets. The period began with the bursting of the dot.com bubble followed by the 09/11 attacks; the sub-prime housing crisis, Lehman default, and global financial crisis; the Greek bailout and Euro crisis; the adoption of quantitative easing; taper tantrums; US-China trade disputes; Brexit and a COVID-19 pandemic. However, this period has also been one of significant human progress.
In his book Factfulness, Hans Rosling demonstrated that nearly everyone thinks the world is more frightening, more violent, more hopeless, and more dramatic than actually it is. We have evolved a predisposition to be pessimistic about the world we inhabit. In reality, step by step, the world is improving. Not every measure, every year, but Rosling presents precise factual data to demonstrate that things improve across a broad extent of the human condition.
We have evolved tendency to focus on the negative, short term, dramatic events of our daily lives while ignoring the more significant factors that are often more persistently positive over more extended periods. We think parochially, but positive, enduring secular trends drive our world more than we care to think.
The relentless progress of evolutionary improvement across many different human domains and endeavours is cumulative. Compound growth is always difficult for us to comprehend. However, as wealth managers who take a long term view, we try and take an optimistic world view and endeavour to position our clients’ portfolios in order to benefit from these long term trends.
We read widely about technical innovation, and we meet lots of companies and sector experts and discuss at length the key factors that are most likely to shape the world over the next twenty years.
We have identified seven core trends are driving our world today. These are:
Many of the trends will shape the successful companies of the future. However, factors of disruption ultimately become just prerequisites for survival. Early adoption of the internet, Amazon’s disruptive growth source, is now a prerequisite for retail survival. In future, the adoption of AI-powered drone delivery might enable Amazon to stay ahead of the field or cause it to lose its leadership to others. Either way, we see these pillars as essential strategic guide posts.
Artificial Intelligence & Machine Learning – 10 years ago, Marc Adressen said that software is eating the world. Although this trend still has a long way to run, the way the software code is being written is changing. We are moving from a world where humans write code to one where code writes code. AI machine learning is writing stories, poems, songs, works of art, business reports, legal depositions, and scientific discoveries. Open AI’s GPT3 and Deepmind’s Alphafold2 are surprising even their developers how quickly they learn to do things to a human cognition level and above. Deep learning combined with low latency networked communications and instant verification of blockchain technology will enable vehicles, drones, and robots to deliver the internet into our real 3D world autonomously. The long-promised Internet of Things will arrive as a spatial web offering augmented reality that can merge into virtual worlds of gaming and digital twins, offering transformational benefits in areas such as personalised medicine and additive manufacturing.
Networked Communications – Human progress has rested on our ability to share our knowledge. Language, handwriting, the printing press, and the internet track a long-term exponential arc that left the time axis far below two hundred years ago. Having adapted to a world where some form of networked communications is ubiquitous, the introduction of 5G is about to take us to a new level. 5G will improve latency (speed of data requests) by 200x over 4G and make network speeds, for the first time ever, significantly quicker than the human reaction time. Simultaneously, network densities will improve by 250x, meaning that there will be capacity for about 1 million connected devices compared to just 4 000 with 4G for any given mobile cell. Finally, all this will happen with a network of devices consuming 90% less power and enhancing the battery life of low powered IoT devices by ten years. 4G network ubiquity brought us Uber and food delivery apps, 5G will get us the spatial web in real-time and in three dimensions. Already 6G is being discussed for implementation from 2030. 6G will enable real-time holographic representations of reality; the merger of virtual reality with reality. It is at this point when the internet merges with the human brain.
Augmented Reality and Virtual Reality – The gaming industry has progressed from a fringe interest group into mainstream media. VR headsets can take us into whole new worlds, where we can assume different personalities, live alternate lives, and even own and trade virtual assets. The gaming metaverse is the primordial swamp that has led to the explosion of crypto-assets. Massive online games are devouring TV, film and even social networks. Mark Zuckerberg is preparing to pivot his whole company on this trend and Apple is strongly rumoured to working on an AR headset as its next big consumer product.
Robotics & Autonomous Transport – The overlapping of networked communications, AI (above) and energy transition (below) allows us to move towards a world of autonomous transport and the Internet of Things. Transportation as a service via land-based vehicle or drone will replace ownership and massively increase asset utilisation and improve unit cost economics, thus eliminating human error from the operating system. Manufacturing will be localised and flexible, with robotic and additive manufacturing requiring very little, if any, human intervention and a large reduction in physical inventories.
Energy Transition – The most significant driver of human progress has been from transitioning to new, cheaper sources of energy. The current transition from fossil fuels to clean and sustainable energy sources is high profile and political. However, the real excitement from an investment perspective is when lower costs drive the transition. Analysis now shows that wind and solar-generated electricity is the lowest cost of supply. With the cost of battery and other energy storage technologies also falling, there is a significant cost down opportunity in energy usage.
Bioscience – If the last 50 years have been the era of microelectronics, it likely the next 50 years will be about the engineering of organic matter and biological molecules. The cost of sequencing a human genome has plummeted from c $100m in 2001 to c $1 000 today, a rate of improvement that exceeds that of Moore’s Law. Combined with improved gene-editing techniques, this offers a massive opportunity in personalised medicine, enhanced human intelligence and wellbeing. It is also transforming the way we grow animal protein and other foods. The development of numerous vaccines for COVID-19 less than a year after the world locked down will prove to be a game-changer, essentially enabling programmable immunotherapies. Two hundred years ago, we exported live smallpox vaccines on the eight-week sea crossing to South America via infected orphans; today, genetic code is sent instantaneously round the world via email attachment; tomorrow everyone will have a digitally encoded DNA twin with personally bespoke healthcare regimes and therapies.
Frictionless Finance – Technological change usually involves a phase transition in money and finance. Europe financed its early adventures in overseas trade via the development of a novel risk-sharing device known as the limited liability company. There have recently been several failed attempts to develop digitally native money. The winners have been e-payment apps like PayPal and Square, which are more user-friendly than traditional payment channels, but run on the rails of conventional money. More recently, there is a growing view that blockchain-based crypto-currencies will more fundamentally disrupt our centralised financial system. It is too early to know how and when this might happen. While digital assets and tokenisation may have become over-hyped, they are unlikely to disappear. Indeed, applying AI to financial decision making, such as credit scoring and underwriting, will demand much greater speed and uptime than our traditional analogue financial system can accommodate. It would appear inevitable that robots will take more financial decisions, so machine-based verification of identity, asset status, and trust need commonly accepted solutions. Pure liquidity of frictionless micro-payments would transform the way we manage our financial system and remove huge dead-weight costs of transaction fees, commissions and tolls imposed by the rail owners of our existing financial markets.
Technological change creates an enhanced opportunity for risk and return. The old market maxim is that investors tend to over-estimate the impact of technological change in the short term but underestimate its influence in the long term. The “paradigm shift” evangelists claiming “this time it’s different”, create bubbles that can destroy both their followers and their critics. Sound investment must ultimately anchor to valuation and reality, combined with the ability to remain invested through the cycle. A classic example of this is the 90% valuation drawdown of Amazon in 2001/2. To stay fully invested through this type of event takes deep pockets and exceptional conviction. As Charlie Munger said: “don’t just do something, stand there”.
At Dowgate Wealth we are primarily stock pickers and choose individual companies that we believe offer the opportunity to grow over the long term. However, we also invest where we can buy growth at a reasonable price. To have one or more of these secular growth drivers providing a tailwind for our companies helps us build our conviction. Conviction builds patience, and as Charlie Munger also said: “The big money is not in the buying and selling, but in the waiting.”
Written by Jeremy McKeown