Blog Andrew Garthwaite: The Acceleration of Disruption is Underestimated
The theme of this year’s Credit Suisse Asian Investment Conference is 'Disruption as Usual'. What does disruption mean to you?
Andrew Garthwaite: Three years ago, we wrote that investors were thinking about technological change at a linear rate, while it was actually happening exponentially and investors were significantly underestimating the economic and micro impact of disruption. We believe the macro trends disruption unleashes are positive for equities due to the following reasons:
- Disruptive technology results in excess savings as the wealthy get wealthier (as they own the unique skills or the capital), which helps to keep real yields low. Moreover, new trends such as the sharing economy improve the productivity of capital;
- We believe technological change is the main reason why labour is not getting pricing power (in particular we think this impact is underestimated in service sector jobs), which helps the profitability of corporates and keeps the profit share of GDP high;
- Technological change results in deflationary pressure, which allows central banks to maintain an unusually loose monetary policy;
- Market structures become more concentrated as the disrupters dominate many end markets and the disruptees are forced to merge.
The lesson has been that anything that is disrupted has de-rated far more than investors expected.
Do you think disruption is the new norm? Why do you think that?
AG: Yes and I think disruption will actually accelerate from here, something I believe many investors are underestimating. We believe four technological advancements are currently coming together, which will further drive technological disruption:
- Sharply rising smartphone penetration (58% currently), unlimited data plans and 5G mean that an increasing share of the population have 24/7 access to high speed internet;
- 3D printing, which can be used in most fields from medicine to manufacturing;
- Advancements in battery storage;
- Advancements in artificial intelligence and computing power mean that a third of jobs done by humans require cognitive skills that can be matched by machines (WEF). Alpha Zero, DeepMind's game-playing AI, beat the world’s best chess-playing computer program after teaching itself to the play the game in less than four hours.
Disruption: Friend or foe for investors?
AG: This depends if you pick a winner or a loser. The lesson has been that anything that is disrupted has de-rated far more than investors expected – for example, conventional retail, non-content broadcasters, advertising agencies. We believe investors should buy the disruptors until they become very expensive (they are not yet) and that over time, anything that is not disrupted will also end up trading on elevated valuations (e.g. residential real estate, leisure/experiences, pure content, defense, conspicuous brands, tires, concessionaries, water utilities, idiosyncratic growth). We also believe that there are many areas that are potentially much more disrupted than investors realize; for example, gas utilities or big cap pharma. We fear that investors think of disruption in a linear way but it is happening exponentially.
What disruptions do you anticipate will present the greatest opportunity for equity investors?
AG: We believe one interesting way to invest on the back of disruption is to buy bonds in high yielding, commodity importing emerging markets. Disruptive technology will drive down inflation, raise productivity (e.g. through the sharing economy, increased banking efficiency and allowing rapid industrialization) and improve the current account (as fossil fuel imports are replaced by wind and solar). Moreover, a digital footprint allows for better tax collection and government allocation of capital. Finally, social media creates better economic and corporate governance. We particularly like Indian bonds or, as a proxy on falling yields, we also like Indian banks (unlike Developed Markets, Global Emerging Markets banks outperform as bond yields fall). Moreover, we like to invest in areas that are not disrupted (even if they are not themselves disruptors) and have a strong macro tailwind (e.g. German residential real estate). On the other side we would try to avoid heavily disrupted sectors such as gas utilities, office REITs, GDS, freight forwarders, retail focused asset management and non-conspicuous brands.