Technology investments have had a strong start to 2019, providing a posi - tive backdrop for our Supertrend “Technology at the service of humans.” Structural growth trends such as increasing data usage and the need for greater efficiency should continue to support this Supertrend. The race between the USA and China for global leadership in artificial intelligence (AI) and automation provides an important long-term catalyst in the deployment of 5G, the adoption of AI applications and digital automation. Both areas – AI and automation – are also expected to become increasingly important in the digital health, fintech and education markets, which are expected to grow strongly in the years ahead.
Ones to watch: 5G and fintech
The adoption of 5th generation mobile networks (5G) has been much talked about in recent months. Discussions at the 2019 Mobile World Congress (MWC), for instance, showed that 5G is expected to provide myriad new use cases for virtual and augmented reality: artificial intelligence; automation, namely Internet of Things (IoT); and healthtech.
In “The Mobile Economy 2019” report, the GSM Association says it expects the number of connected devices to triple to 25 billion between 2018 and 2025 and global IoT revenue to quadruple to USD 1.1 trillion, supporting our conviction that 5G is driving the next phase of digitalization. By 2024, 5G networks are expected to carry 25% of mobile data traffic, a nearly eight-fold increase from 2018, according to the Ericsson Mobility Report of November 2018, while global monthly data traffic per subscriber is expected to increase at a compound annual growth rate of around 30% to 24 GB by 2024. On the back of 5G deployment, we expect investments in telecom infrastructure to increase over the next 3–5 years.
As digitalization progresses, one of the areas we believe will become increasingly important is financial technology (fintech). Innovation in this area has been driven by changing customer needs, technological progress, rising adoption rates and regulatory changes - drivers we expect to further accelerate. And this innovation will likely lead to disruption: firms like Revolut, which offers low-cost credit cards, are putting pressure on established revenue streams.
At the same time, an active fintech environment forces larger incumbents to continuously innovate. JPMorgan, for example, spends over USD 11 billion annually on technology (almost 20% of its cost base), underscoring the importance of its digital offering to clients. In recent months, investor interest has focused on payment services, where volumes and growth rates are high and technological capabilities are quickly evolving. A prominent example is the Apple credit card, a virtual card built into the Apple Wallet app. From an investment point of view, we favor focusing on credible, technology-enabled niche fintech providers, as well as larger providers with financial firepower.
3.2 Virtual reality/augmented reality
Opening up to a new world
Over the last two years, discussions regarding virtual and augmented reality (VR/AR) have focused mainly on the applicability of VR/AR technology. Even so, only a few applications have emerged. Given high costs, adoption rates have been rather slow so far. However, we expect VR/AR to gain greater prominence in 2019, as expectations for the technology are lowered and better, cost-efficient solutions emerge. In our opinion, mobile AR will be a key driver of the VR/AR market going forward, as the development of AR applications is expected to accelerate.
In 2018, enterprises in different industries explored the AR technology extensively, recognizing its value. As enterprises increase their focus on the commercial use of VR and AR, new investment opportunities should emerge. According to VR analytics group Digi-Capital, venture capital investments in VR/AR amounted to USD 7.2 billion between Q4 2017 and Q3 2018, USD 4 billion of which were invested in computer vision/AR technology. In addition, the number of AR-compatible smartphone users is growing, reports ARtillery Intelligence, reaching 762 million as of July 2018. The gaming sector, in turn, is seeing a transition into streaming, with recent initiatives by Apple, Google and Snap to launch game streaming platforms or services a case in point. In our view, these initiatives should promote the global adoption of mobile gaming or streaming, offering significant new growth potential for publishers and content providers.
Revenue estimates for the consumer VR market for 2019/2020 (USD 6.2 billion/9.6 billion) are still higher than for AR/mixed reality (MR) (USD 4.4 billion/USD 7.2 billion), according to game research firm SuperData. However, a 2018 study by application software firm PTC reveals that industrial enterprises have started piloting AR projects, enhancing their understanding of AR’s potential in improving efficiency, productivity, safety and customer experience. Most of these companies expect to launch AR-based solutions over the next 12 months, indicating a high pace of adoption. These developments strengthen our view that 2019/2020 will witness significant AR integration into enterprises, both in terms of customer applications and internal operations.
3.3 Artificial intelligence
The race for global leadership
The future of AI remains promising, opening attractive new avenues for companies. We expect AI to help companies increase revenues by identifying customer needs, reducing costs and enabling efficiency gains. Furthermore, AI applications are continuously improving and increasing in range, providing opportunities for industries and investors.
In 2018, several large technology companies accelerated their efforts to develop AI applications. Alphabet-owned DeepMind, for example, further improved its computer program AlphaZero, which masters games like chess, and continued to actively develop AI technologies related to health care. Separately, AI programs from both Microsoft and Alibaba beat humans in a Stanford reading comprehension test and accurately translated news stories from Chinese to English.
On a larger scale, AI growth could also be significant for global economies. The McKinsey Global Institute estimates that AI could potentially boost global economic activity by around USD 13 trillion by 2030, which could mean an additional 1.2% GDP growth per year. In an effort to capture the potential that AI offers, recent years have brought to the fore an intensifying race for global AI leadership between the USA and China. In 2017, China published its Next Generation Artificial Intelligence Development Plan, establishing how it intends to become the world leader in AI by 2030 with a domestic industry worth nearly USD 150 billion. Meanwhile, the US administration’s summit on AI in May 2018 highlighted the USA’s goal to maintain American leadership in AI. To that end, US President Trump signed the American AI Initiative in February 2019, directing federal agencies to invest more in AI research and development. Efforts to boost research investments are also underway in Europe, with the EU signing the Declaration of Cooperation on AI in April 2018. These examples underscore how economies are recognizing that lagging behind in this area may become a long-term disadvantage.
3.4 Industry 4.0
Robots for hire
2018 was a subdued year for automation, as a majority of automation companies experienced decelerating revenue growth. Many of these companies are cyclical and therefore felt the slowing global economy. In Japan, for instance, robot shipments declined. In the USA, demand from the auto industry weakened, but the non-automotive segment remained strong. Nevertheless, the adoption of robots is continuing, with Amazon a case in point: in 2018 the company further increased the number of autonomous warehouse robots while reducing the number of temporary workers.
Despite cyclical headwinds, we believe that the outlook for automation remains attractive. We expect automation will not only be driven by the continued rise in factory applications, but will become increasingly important beyond the industrial sector. For instance, machines that sequence DNA have become materially cheaper in the last 20 years, which makes the work on DNA synthesis, a large bio automation market, much more viable. We identify numerous other compelling non-industrial areas of growth, for instance smart home automation, retail automation, workflow automation and transport automation, to name but a few.
New avenues of treatment
Healthtech, where information technology meets healthcare applications, has shown considerable growth in recent years, attracting investor interest. Four distinct areas stand out: diagnostics, therapeutics, care delivery and support functions.
In diagnostics, the most exciting health technology applications are modern imaging and genetic analysis techniques that are less invasive than previous standards of care and have scope to further reduce invasiveness. Using such techniques, physicians are able to obtain highly detailed information of a patient’s body without large doses of radiation. Similarly, using genetic analyses, physicians can gain clear-cut patient information without having to resort to other measures that often leave room for interpretation.
In therapeutic health technology, the innovative frontier currently encompasses robotic surgery and some newer genome-directed biotechnological approaches. The latter notably include areas like gene therapy – which in the past 12 months saw a flurry of merger and acquisition activity – and RNA (ribonucleic acid) technology. The initial public offering (IPO) of Moderna in 2018 highlighted to what degree investors appreciate this technology – it became the biggest biotechnology IPO to date.
The care delivery aspect of healthtech currently revolves around telehealth offerings, which enable care delivery at a distance, be it kilometers or continents. One particular provider, Teladoc Health, by now administers millions of virtual physician visits (via mobile/tablet/PC) per year and continues to grow strongly. Not only does such technology reduce system-wide healthcare costs due to greater efficiency, but it also makes it possible to extend care to regions that lack a sufficient number of physical healthcare locations.
Lastly, the support function of healthtech in our view provides some lower-visibility, but highly essential services. In the global healthcare system, where the records market remains highly fragmented, the most important near-term opportunity is transforming electronic healthcare records into a more relevant, useful and transferrable tool while maintaining the confidentiality and security of records. Such tools may even integrate an ever-increasing wealth of data sources (e.g. wearable computers such as watches). It is our understanding that apart from healthcare-centric software vendors, traditional technology companies have also ventured into this field, albeit silently so far. It is a market that deserves watching.
The key beneficiaries of this third Supertrend are, in our view:
- Telecom equipment, semiconductor firms with strong exposure to the rollout of 5G networks; tower companies and construction firms that maintain and implement 5G networks.
- Software, IT services and semiconductor companies that are enablers for AI, VR & AR and industry automation processes.
- Internet platform providers benefitting from the disruption of traditional businesses, for instance in agriculture, healthcare and media.
- Companies in the healthcare sector that use technology to improve execution in the areas of diagnostics, sequencing, therapeutics and care delivery.
- Fifth generation (5G): Set to greatly enhance the speed coverage and responsiveness of wireless networks. 5G is expected to be up to 100x faster than a typical cellular connection.
- RNA technology: Ribonucleic acid (RNA) technology includes RNA interference approaches to silence specific genes or messenger RNA technology to mimic the presence of certain genes.