In partnership with
How thematic equity portfolios are taking advantage of tomorrow’s internet-connected marketplace
Investing in a new industrial revolution
For professional investors only. However, it is not intended for distribution to any person or entity who is a citizen or resident of any locality, state, country or other jurisdiction where such distribution, publication, or use would be contrary to law or regulation. This material has been issued and approved by Pictet Asset Management Limited, which is authorised and regulated by the Financial Conduct Authority, and may not be reproduced or distributed, either in part or in full, without their prior authorisation.
Evolving consumer behaviour is revolutionising how businesses operate, resulting in, for example, the rapid transmission of information via digital networks. Protecting against cyber-attacks and guarding vital infrastructure to food safety and personal security is also changing how businesses operate. Consequently, companies that are able to adapt by creating innovative products and services that meet the new demands of this changing world economy should benefit from unrivalled growth potential. This is forcing investors to focus instead on the structural forces shaping our world: megatrends. These are a discrete group of powerful social, demographic, environmental and technological forces of change that are reshaping our world. How we react to these megatrends will determine not only our futures, but those of the coming generations. In this Spotlight guide we review the long-term investment opportunities of these trends.
Estimated size of global cyber security industry by 2050
The digital transition will lead to a huge shift in many market segments, including healthcare
Significant growth potential for digital investments
Despite the obvious advantages of these new technologies, companies are still reluctant to fully embrace digital technologies. Of the total healthcare spending of $3bn in the United States, only 3% is dedicated to information technology (IT) in hospitals and doctors’ offices. Of these investments, almost nothing is spent on digital software. This segment is expected to experience a significant growth in the upcoming years. In the financial industry, an average of 10% is dedicated to IT. However, by far the largest part of these spendings is related to old and legacy IT-systems. And according to research by Accenture, only 2% of banks’ technology investments are related to fintech. “In terms of the opportunities which digital can offer, we are barely scratching the surface,” concludes Sejournet. “The digital transition will lead to a huge shift in many market segments, like the financial industry, the technology sector and among healthcare companies. “For well positioned companies in these sectors there will be plenty of room for growth. Will our future look like that movie, Minority Report? In my opinion, the answer is definitely yes!”
A rising tide
The increasing penetration of smartphones and other internet connected devices will lead to an acceleration of the digital trend. As a result of the increasing use of social networks, the growth of online video and the rise of the IoT, companies have the opportunity to gather more and more data. At the same time, the development of new technologies and the improvement of the existing ones allows companies to make better use of that data. “Data is the ammunitions of digital companies, while powerful algorithms and AI are their weapons,” says Sejournet. The combination of the increasing amount of data with the improvements in algorithms and AI can be expected to cause huge shifts in almost every industry. “Just think of the way robo-advisers and technologies such as blockchain are already changing the financial sector,” says Sejournet. “And in the healthcare industry, doctors will get all kinds of new tools to make a diagnosis and to communicate with patients. In the United States, a company named Teladoc already provides a platform like Skype for doctors.”
The digital revolution is gaining momentum and improvements in algorithms and artificial intelligence (AI) will change the character of most industries. This may seem like a bold statement, but consider the impact the internet has already had on education, communication, business, science, government, and humanity. For most people in the developed world it feels like a large part of their daily life has already shifted to the digital world. According to research by eMarketer in 2016, the average person in the United States spends almost six hours a day online; they spend more than half of that time online through a smartphone or another mobile device. Sophisticated AI, wearable technology, crypto-currencies and the expansion of the Internet of Things (IoT) are just some of the developments testifying to the pace of change in digital technology. Many digital companies are now supported by solid business models, balance sheets and earnings. According to Sylvie Sejournet, the digital revolution has only just begun: “Online payments represent less than 1% of the total global payments of over $54bn. And only 9% of global retail sales are conducted online. Even in the advertising industry, which is known for its online progress thanks to companies like Google and Facebook, the online penetration is less than 30%. In short: for companies in these sectors, considerable growth is to be expected.”
The digital transition has only just begun
Sylvie Sejournet, manager of the Pictet-Digital fund, discusses the next evolution of the internet and why we are closer to a ‘Minority Report’ future than we think
Over the last couple of years, detected cyber-attacks have outnumbered internet connected devices
Estimated number of devices with an internet connection by 2020
All change please
“There are two things that stand out from a security perspective. The first one is the intended upgrade of US infrastructure, which is likely to mean hundreds of billions of dollars are available for infrastructure investments such as roads, railroads, networks and other public facilities.” According to Dupraz, this will supercharge the demand for all kinds of security products, services and technologies. A good example is the construction of a new airport, which is about much more than building runways. For example, security technologies and solutions to make sure everything runs smoothly, from check-in to luggage handling and security checks. He says: “Over the last couple of years, detected cyber-attacks have outnumbered internet connected devices. I believe it is this kind of growth opportunities that will make security a promising investment theme going forward.”
Yet there is a downside to the prospect that IoT will make everyday life more comfortable. The number of opportunities for malicious hackers to disrupt consumers’ life is increasing exponentially. In 2014, hackers managed to send hundreds of thousands of malicious spam emails via over 100,000 Smart TVs, refrigerators and other home appliances (Bloomberg, 2015). And what of the current political environment? What impact will Donald Trump’s policies have on the security theme? “We are living in a polarised world. At present, the extremes seem to be winning. The victory of Donald Trump in the US elections is a sign that this trend is accelerating. Whenever there is an important new development in politics, technology or in another important field, the demand for security steadily increases.
The invisible risk of a connected world
Everyday life is becoming more convenient as new appliances are launched online. But in a connected world, disruptions can be devastating. A single business in one small corner of the planet can be impacted by geopolitical events and weather disasters thousands of miles away, supply chain issues, vendor failures and more. Simple devices can become versatile digital tools when they are connected to the internet. The best example of this metamorphosis is the upgrade of mobile phones to smartphones. For many people, their smartphone has become their preferred platform for reading e-mails, surfing the web and ordering an Uber taxi. The fact that a smartphone can also be used for an old-fashioned phone-call is often an afterthought rather than the main purpose. A similar revolution will soon occur in and around the house. “The price decline of semiconductors for wireless communications is an important driver of the increase of internet connectivity,” says Frédéric Dupraz. “As a result of more efficient production methods and technological development, it is common for semiconductor-capacities to double every two years, enabling the price of semiconductors to be twice cheaper than they used to be. In the technology industry this phenomenon is known as Moore’s Law. It allows electronics manufacturers to include wireless semiconductors in all kinds of appliances: from thermostats to toasters and from fridges to dishwashers.” According to research by Cisco in 2011, the number of devices with an internet connection is expected to double from 25 billion in 2015 to over 50 billion by 2020. In the technology world, this trend is referred to as the Internet of Things (IoT) and it is not hard to imagine how IoT might make our lives easier.
“Refrigerators will be able to make shopping lists with items that need restocking,” says Dupraz. “When you start your car to drive home from the office, a message will be instantly sent for the thermostat at your home to adjust the temperature in your apartment to a predetermined level. Manufacturers might even connect appliances to the internet just to aggregate all kinds of usage data.”
Companies need to keep up with new technologies and search for alternative ways of providing safety, argues Frédéric Dupraz, fund manager of the Pictet-Security fund
A bundle of services from chatting to financial payments to gaming that are providing business opportunities
Some estimates predict that the AI market could grow from $5 billion to $120 billion by 2025
Technology trends to watch in 2018
Q: The more connected a country is to the global digital economy, the more susceptible it is to cyber-attacks. How can governments and businesses in these countries develop greater resilience, as falling back on paper-based processes when critical systems and data get compromised is not an option?
Of course, the world in general is becoming more connected. The level of traffic is constantly increasing and we should be better protected – but we will never be 100% sure that the network is safe. Yet at least we decrease the risk of being hacked by deploying cyber security solutions. We had a very good example of the risk with a ransomware episode that went global and spread so rapidly because a lot of companies did not have the appropriate level of protection, and also because they had not proceeded to the software upgrades that were recommended by the developers. Companies need to take that risk more seriously and increase their cyber security budget. It won’t protect the network fully but it would diminish the danger and the potential for viruses to spread if more companies were better protected. And I think the regulations that are being implemented in Europe and elsewhere in the world will absolutely achieve that objective.
Q: When it comes to the security of systems and the protection of data, how advanced is today’s cyber security?
It’s very difficult to fully protect a network because hackers will always find a way to penetrate it. There is no solution that is 100% safe, unfortunately. But these days, some of the security players intend to organise or reorganise their operations into platforms meaning they would only pay for what they need. Some companies are already organised in this way; others are putting together these types of platform offerings. What will be interesting to follow is the inclusion of AI capabilities into cyber security companies. This would be AI in the form of software that helps identify abnormal activity in the network, and responds rapidly to potential threats. Other, data intensive industries will also be affected. I’ve already mentioned the mortgage and payments industry, and how blockchain could be used to secure the transactions in these areas. So we will see these types of developments for the industry in the coming years.
Q: What trend currently stands out in the security space?
Due to the rise of new technologies it is now more important than ever to keep searching for alternative ways of providing safety and security. Nowadays you don’t even have to cross a physical border to strike at a target. In one challenge, hackers succeeded in taking control of a Jeep Cherokee while it was driving on the highway, using the wireless internet connection of the car. They were able to turn on the windscreen wipers, shut down the engine and disable the brakes. While there are clear advantages to connecting a car to the internet, it brings about security risks. This illustrates why digital security is one of the biggest drivers of the theme going forward. Currently, there are over 100,000 cyberattacks a day, according to PwC. I expect a rapid increase in the number of attacks as the number of internet connected devices is forecasted to reach 30 billion in 2020 (IBM, 2014). IT security products will not only protect against cyberattacks, but biometrics and surveillance systems will help fight crime and terrorism through large scale data mining. This will make it possible to detect anomalies and provide advance warning of threats.
Q: What is the long term outlook for the digital theme?
Well the fundamentals of our companies have been very strong. Earnings momentum has been strong and the valuations in our investible universe of companies remain at attractive levels. My view is that we’re not in bubble territory but that being said, some stocks in January did move ahead of the fundamentals. So probably over the short term, it would be better to be prudent for new investors. But if we have a correction in the market, then that will be a good time to jump in because what we have seen is that the momentum remains strong. We believe that most of our markets remain underpenetrated, meaning that our companies could still benefit from pricing opportunities and a market share increase. So we don’t see any kind of saturation in terms of markets. There is a lot of innovation going on. We have companies that are on average spending 12% of their sales in research and development (R&D) which is three times more than what the average companies in the MSCI World are spending on R&D. So as long as our companies remain innovative and keep spending on R&D, they will continue to be well positioned from a competitive point of view.
Q: The Internet of Things (IoT) is garnering lots of attention. What investment vehicles are you using to make a play for the IoT?
The real added value of the IoT is in its capacity to gather data and information through all the connected devices, sensors and cameras. This value comes through on the software and analytic side of things rather than the hardware. That’s why today there are several companies like Splunk who perform big data analytics. Salesforce has also developed a kind of IoT cloud which analyses data from different devices. So I think we should look at the IoT from a value chain point of view. Big internet companies are well positioned in this space. Google, Amazon, Baidu, Tencents, are all gathering data, and they are truly benefiting from a competitive advantage at this stage.
Q: What are some of the technologies and trends that threaten existing business models, and what sort of opportunities do they offer?
Peer-to-peer lending is another disruptive segment in the financial payments space. Further, we use a lot of paper when it comes to mortgages and home transactions, and blockchain looks set to disrupt the existing paper-based models. Elsewhere, social media platforms are becoming truly massive ecosystems and if you look at the Asian companies in that space, you see that they have much more developed ecosystems; more so than some of their US counterparts. Also, the gaming industry is moving more towards augmented reality and virtual reality. So we have a bundle of services from chatting to financial payments to gaming that are providing business opportunities and increasing the consumer experience.
Q: Digital disruption is here to stay. What are the long term and short term growth drivers behind the sector?
More than 52% of the world’s population are now connected to the internet so we have the infrastructure in place for rapid advances in digital technology. From Medidata in healthcare to Lending Club in finance to Tesla in the automobile industry; these companies are truly shaking up the brick and mortar industries of old and proposing new solutions. One key trend in the digital space is the arrival of artificial intelligence (AI). Developers are embedding AI algorithms to improve the efficiency of software, and to help users analyse the collected data. Some estimates predict that the AI market could grow from $5 billion to $120 billion by 2025. So AI is a trend which is definitely important. As such, our investable universe of companies will include more players of this type. Companies like Zendesk, who develop ‘chatbots’ for online customer support, and Salesforce who now offer an AI capability through its Einstein service.
Innovation and automation are running rampant in today’s digitised marketplace. Pictet Asset Management’s senior product specialist for Thematic equities, Alexandre Mouthon, discusses the future of digitisation and how tech companies are tackling the cyber security challenge
BIOMETRICS: Helping to fight crime and terrorism through data mining
Software as a service On demand infrastructure Resource pooling
Messaging platforms Content/commerce platform O2O on demand services
M2M communication Data collection/ integration
Connected devices Smart home/cities Wearables
Internet of Things
Blockchain Payment/wallets P2P lending
Rent vs buy Efficient asset utilisation
Hazardous waste management
Guard services & personal protection
Testing & controlling
Helmets & protective lenses
Airbags & night vision systems
CCTV & video surveillance cameras
Police & forensic tools & kits
Physical Security Products
Surveillance & access control systems
Secure electronic payment
IT Security Products
CLICK BOXES FOR DETAILS
Disruptive digital trends which could benefit from AI
Opportunities by investment segment
IT Security Products
Physical Security Products
Digital technology is revolutionising the global economy, especially through the growth of mobile internet access as well as the new generation of intelligent and predictive software (AI). It is providing faster, cheaper and more personalised solutions for businesses and consumers.In addition to sophisticated AI, wearable technology, crypto-currencies and the expansion of the Internet of Things (IoT) are some of the other developments which testify to the pace of change in digital technology.
Feeling safe and secure is a fundamental human need. Security is becoming increasingly important to governments, businesses and individuals around the globe. The demand for security is being driven by increasing urbanisation and a perception that the safety measures being taken by public bodies are insufficient. Additionally, constant innovation in mobile technology and e-commerce means cyber security must be continually upgraded, while more stringent safety legislation is resulting in higher spending on security services, such as food testing and inspection equipment.
As the “e”-volution starts to reshape our world, savvy investors are seeking value in the Security and Digital themes
Alexandre joined Pictet in 2012 and is a Senior Client Portfolio Manager. Before joining Pictet, Alexandre spent six years as Head of Asset Management at Pentagram SA, responsible for fund selection and asset allocation strategy. Between 2001 and 2006, he was a Deputy Director at UBP, responsible for the buy-side TMT equities analysts, the selection of third-party sectoral and US funds, co-managed the UBAM Tech fund and managed the UBAM Multifunds US Equities fund. He began his career as a Buy-Side US Equities Analyst at BNP Paribas in 1997. Alexandre is a Chartered Financial Analyst (CFA) charterholder and holds a degree in Economic Sciences specialized in Finance from the University of Geneva.
Alexandre Mouthon, CFA
Senior Client Portfolio Manager
Sylvie joined Pictet Asset Management in 2005 and is a Senior Investment Manager in the Thematic Equities team where she launched the Digital fund in 2008. She started her career within the financial department of TF1 (Primary French Television channel). She then joined Fortis Bank in Paris, where she spent eight years as a sell-side analyst in the TMT sector (Telecom, Media and technology). In 2000, she was nominated for the Agefi Award for best junior analyst and in 2004, won the AQ Award for best analyst, based on her recommendations for 537 mid-cap stocks. Sylvie holds a Master degree in Banking and Finance from the University of the Sorbonne in Paris and is a member of the French Society of Financial Analysts (SFAF).
Senior Investment Manager, Thematic Equities Team
Frédéric joined Pictet Asset Management in 2007 and is an Investment Manager in the Thematic Equities Funds team since 2009. Before joining Pictet in 2004, Frédéric was a consultant in the Financial Services industry with PricewaterhouseCoopers and IBM. He started his career as a research assistant working on energy problems at the University of Geneva. Frédéric holds a Master’s degree in Econometrics from the University of Geneva. He is also a Chartered Financial Analyst (CFA) charterholder and certified Financial Risk Manager (FRM) of the Global Association of Risk Professionals.
Frédéric Dupraz, CFA
Senior Investment Manager, Thematic Equities Team
Meet the Pictet team
www.incisiveworks.com © 2018 Incisive Business Media (IP) Ltd