Blog Dan Fineman: Markets tend to overlook the vulnerabilities of disruptors to disruption

Dan Fineman: Markets tend to overlook the vulnerabilities of disruptors to disruption
Our Co-Head of Equity Strategy in Asia Pacific reminds us that even disruptors can be disrupted.  These are the things that investors should pay attention to, according to Dan Fineman in our interview with him.

What has been the biggest disruptor in APAC equities over the past 12 months and its impact?

Dan Fineman: The biggest disruption for Asia last year was not a forward movement in technology, but a backwards movement away from a rules-based trading system.  The US-China trade war is not an isolated phenomenon, but part of a broader breakdown of the post-World War II multilateral trading infrastructure.  In the past 30 years, Asia has integrated itself in a spaghetti bowl of complex global supply chains dependent on low barriers to international trade.  The sharp impact the trade war has already had on Asian economies reveals how sensitive the region remains to trade disruption.  As the most export-dependent region on the planet, Asia would suffer disproportionately if the certainties of a WTO-based trading structure were disrupted.

Not much more than a decade ago, smart phones, social media and e-commerce began revolutionizing how people compute, communicate and shop, and big players emerged. But in Asia those giants are already facing new competition from more innovative or lower cost competitors.

What disruptive trends are investors not paying enough attention to and why? 

DF: Markets tend to overlook the vulnerabilities of disruptors to disruption.  Not much more than a decade ago, smart phones, social media and e-commerce began revolutionizing how people compute, communicate and shop, and big players emerged.  But in Asia those giants are already facing new competition from more innovative or lower cost competitors.  In Asia, networking effects and branding have been weaker than in developed markets, leaving the big players in smart phones, social media and e-commerce generally less than dominant.  The greater competition could lead to more vibrancy and innovation than in regions with unassailable market leaders, but the uncertainties make it harder to pick the winners.

Are any sectors safe from disruption?

DF: In theory, the financial sector should be the most vulnerable to disruption.  Technology has yet to be fully deployed, and heavy regulation in Asia protects the industry from open competition.  But quick change does not seem likely.  The main incumbents—big banks—are using their scale to turn heavy technological investments into a barrier to entry, and regulators are reluctant to deregulate.  In China and India, the main disruptors—non-bank financial companies—are in full-retreat, leaving incumbents stronger than ever.  Rather than disrupting incumbents, technology will most likely make its impact felt in the financial sector by improving efficiency, lowering costs and raising profitability of the big banks and insurers.